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The poor housing
market has been big
news for several
months now as
property owners who
bought at the peak
of a "housing
bubble" are now
having difficulty
selling due to
either a lack of
buyers or at least a
lack of buyers at
prices sellers are
willing to accept.
So what caused this
state of affairs?
And who is
responsible?
In the following
article Susan Walker
of Elliot Wave
International
addresses this Issue.--
Editor
Wanted:
Prime Suspect of
Housing Market
Murder
By Susan C. Walker,
Elliott Wave
International
October 8, 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
sub-prime 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
sub-primes 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" rated
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
sub-prime 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
Socioeconomic
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]
Cont.
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