Credit Crisis: Before & After

According to a recent review in the New York Times, “Two Angry Books” have just published, to gauge the enormous toll the credit crisis is having on the U.S. economy. Quick synopsis: the American public is mad as hell and they’re not gonna fake it anymore.

Both authors have impressive backgrounds in the field of economic politics.


One worked in Richard Nixon's administration, the other is a former investment banker.

One thinks a “Volker”-esque Federal Reserve could save the financial day; the other that America is doomed.


Even so, both agree on the main reason for the credit crisis: Debt (also known as “financial crack cocaine”) was turned into a “profit machine.”

We can all see the outcome from our front doors:

The biggest names in banking have tumbled, the housing market has crumbled in its worst slump since the Great Depression, and credit values have collapsed -- all the while the Federal Reserve has slashed rates by 300 basis points in just six months, the biggest series of cuts since 1984.

As the subject of a book, it’s definitely a page-turner.

But, as the central theme of a person’s actual life (many millions and counting) -- it’s more a rage burner.


It goes without saying that the victims of the credit debacle would have preferred a paperback writer who warned of the impending implosion BEFORE it happened -- vs. one, two, or a thousand who describe the disaster long after the vehicle has already gone over the cliff.

Truth is, there was such a writer: Robert Prechter Jr. And there was such a book: Conquer The Crash, copy write date 2002.

As the mainstream “experts” paved the way for a new “paradigm” in real estate which expected prices to rise indefinitely AND high-risk borrowers to get the home of their dreams, Conquer The Crash foresaw the “road to riches” taking a drastic turn. Consider the following excerpts in light of unfolding events:

• "What screams "bubble" -- giant, historic bubble -- in real estate today is the system-wide extension of massive amounts of credit to finance property purchases."
  

• "Another remarkable trend of recent years adds to the precarious nature of mortgage debt. This widespread practice is brewing a terrible disaster…the problem with these schemes is that their success and continuation depend upon continuously rising property prices. Confidence is the only thing holding up this giant house of cards. When real estate prices begin to fall, lenders will experience a rising number of defaults on the mortgages they hold.”
  

• “There are five major conditions in place at many banks that pose a danger: low liquidity levels, dangerous exposure to leveraged derivatives, the optimistic safety ratings of banks, the inflated values of property that borrowers have put up as collateral on loans, and the substantial size of the mortgages that their clients hold compared both to those property values and to the clients’ potential inability to pay under adverse circumstances.”

At every step of the ensuing decline, our Financial Forecast Service publications have picked up where Conquer the Crash left off, and continue to do so.

As Bob Prechter points out in the March 2008 Elliott Wave Theorist: “It’s more useful to be ahead of topics that will mesmerize people later.”