Here's an interesting chart from the Bank of England's 'Financial Stability Report'(.pdf) (October 2007 p.22).:
The main point that emerges from the map is a simple one: namely that although sectors such as subprime or leveraged loans have grabbed headlines this summer - and inspired panic due to the potential of these assets to generate losses - the assets represent a tiny part of the financial system as a whole. On sheer size, subprime securities are dwarfed by other asset classes, such as equities.
This doesn't come as a surprise, since it's conventional wisdom that the subprime market is relatively small. But does that make it unimportant? Note how Felix Salmon from Portfolio.com reports the findings:
The entire market in subprime debt is just 1.4% of the size of global equity markets. Or, to put it another way, a 1.4% downward fluctuation in stocks erases the same amount of value as if all subprime-backed bonds were collectively marked to $0.
This strikes me as being neither obvious nor nuanced. The man on the street would surely realise that writing off subprime bonds would have a greater knock on effect than this. The expert would surely see that although the modal asset-backed security isn't subprime, it's the marginal traders who shift markets., and thus adverse selection might be as important as moral hazard. This might be an error on my part, possibly due to Salmon's desire for a succint snippet. But 6 months on from when this was written, is anyone doubting the scope of sub-prime issues?