 Wanted:
Prime Suspect of Housing Market Murder
Susan C. Walker
Elliott
Wave International
written Oct 8, 2007
published Oct 15, 2007
Helen Mirren accepted her Emmy
award for best actress in the mini-series, "Prime Suspect"
with elegance and grace. Just the opposite of the tough detective
superintendent character she plays who tracks down murder suspects
in England. Who would Jane Tennison pick out as the prime suspect
for the murder of the U.S. housing market and the resulting gruesome
credit crunch?
Suspect No. 1 - Phil Spector
No - sorry, wrong case,
wrong suspect. Spector has been on trial for the murder of a
guest at his home (the judge declared a mistrial this week),
but Spector has nothing to do with the subprime mortgage fallout
and ensuing credit crunch. O.J. Simpson, who stands accused of
trying to "recover" his sports memorabilia, is not
the prime suspect either. If the crime doesn't fit, you must
acquit.
Suspect No. 2 - Alan Greenspan
Says that he didn't
catch on for a few years that subprime mortgages could create
a problem for the economy. As chairman of the Federal Reserve,
he let easy credit ride, which facilitated the housing bubble
and the subsequent implosion. Could liken his behavior to supplying
the gun to a rampaging murderer. Guilty of aiding and abetting,
but he's not necessarily the prime suspect.
Suspect No. 3 - Angelo Mozilo
Angelo Mozilo, CEO
of Countrywide Financial (largest mortgage company in the United
States), says he kept his staff writing subprime mortgages day
and night, because if they didn't, then home purchasers would
just find someone else to give them a low-quality mortgage. Company
went from writing 4.6% of its overall mortgages as subprimes
and low-documentation loans in 2004 to 8.7% in 2006. Guilty of
greed and a poor business plan but not murder.
Suspect No. 4 - S. &
P. and Moody's
Oh, whoops, say these
rating agencies, we thought that once you sliced up a BBB security
thinly enough and packaged it with other more desirable collateralized
debt obligations that we could call it AAA. Did we mislead anybody?
Again, aiding and abetting but not a prime suspect.
Suspect No. 5 - Goldman
Sachs and other investment banks
Says that their investors
wanted higher returns and that collateralized debt obligations
spiced up with subprime mortgages served the purpose. And besides,
they say, the rating agencies gave them an excellent rating.
Guilty of acting like a fence but not the prime murder suspect.
The True Prime Suspect
All of these are worth
a look as suspects, but the true prime suspect has neither a
first name nor a last. It's known as "social mood,"
and its m.o. is "herding behavior." That's our real
murderer, the one that quashed the hopes and dreams of those
who believed that house prices would always go up. Social mood
changed, and with it changed the idea of what were smart financing
moves to purchase a house. Suddenly, as house prices began to
fall and subprime mortgagees began to default on their loans,
the stick house built on low-quality mortgages seemed like a
really bad idea.
Who knew? When social mood
was positive, mortgage writers pushed people who couldn't really
afford a mortgage into believing they could. Then they sold the
mortgages to eager investment bankers who sliced them up into
small packages of risk and re-packaged them with less risky securities.
Then the ratings agencies gave their stamp of approval: AA? Why
not AAA? And eager investors who wanted higher returns bought
them up.
But now the game is up. When
social mood turns from positive to negative, fear replaces greed,
and people begin to see the riskiness for what it is. When social
mood changes from positive to negative, markets turn from bullish
to bearish. And no one can stop it - not even the Fed.
This is how Bob Prechter, president
of Elliott
Wave International, describes the phenomenon:
"Like credit inflation,
credit deflation is in fact an intricate, interwoven process,
whose initial impetus is a change in social mood from optimism
toward pessimism. If you are still on the fence about this idea,
ask yourself: What changed in the so-called "fundamentals"
between June and August? The answer is: absolutely nothing.
Interest rates did not budge; there were no indications of recession;
there were no changes in bank lending policies; there were no
chilling government edicts.
"The only thing that changed
was people's minds. One day sub-prime mortgages were a fine investment,
and the next day they were toxic waste. There was no external
cause of the change... According to socionomic theory, the stock
market is a sensitive indicator of such changes in mood. This
is why The Elliott Wave Theorist has continually said
that the financial structure will hold up as long as the stock
market rises. A downturn occurred in mid-July, and its consequences
in terms of negative social mood are becoming swiftly evident.
Remember, C waves (see Elliott Wave Principle, Chapter
2) are when optimistic illusions finally disappear and fear takes
over. Sounds like now." [Elliott Wave Theorist, September
2007]
How To Protect Yourself
from the Prime Suspect Who is Still on the Loose
Social mood has turned ugly
and is likely to continue its murderous rampage, leaving the
policymakers helpless. As analysts Steve Hochberg and Pete Kendall
write in The Elliott Wave Financial Forecast: "The
Fed does not "inject" liquidity; it only offers it.
If nobody wants it, the inflation game is over. The determinant
of that matter is the market. When bull markets turn to bear,
confidence turns to fear, and a fearful people do not lend or
borrow at the same rates as confident ones. The ultimate drivers
of inflation and deflation are human mental states that the Fed
cannot manipulate."
What should you do to protect
yourself in this time of falling home prices, a powerless Fed
and a contracting economy? Bob Prechter wrote one of the best
how-to books. It's his business best-seller, titled, Conquer
the Crash, How To Survive and Prosper in a Deflationary Depression.
You might want to start there.
Note: You can read a FREE 9-page
chapter from Conquer the Crash - You will learn the implications
of the massive credit expansion, what triggers the change from
boom times to recession, and more.
written Oct 8, 2007
Susan C. Walker
Susan C.
Walker
writes for Elliott
Wave International, a market forecasting and technical analysis
company. She
has been an associate editor with Inc. magazine, a newspaper
writer and editor, an investor relations executive and a speechwriter
for the Federal Reserve Bank of Atlanta.
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