Prices fell hard during Friday's stock market trading (Mar. 7), with the major indexes also strongly lower on the week.
*****
Yesterday I said that the Economist magazine had just published a favorable review of a book about the housing market crisis. The author is a respected financial journalist, and a "thumbs up" from a publication like the Economist suggests a book that deserves to be taken seriously.
That said, a couple of sentences from the review affected me like fingernails scratching across a blackboard: "The first big book on the credit crunch saw the crisis coming three years ago," and, saying that the author's "provocative book is…a well-aimed opening shot in a debate that will only grow louder in coming months."
At face value, those remarks mean that this author's insights and book amount to a "first."
My reply is simple: Read below and guess the "who" & "when" of the quotes.
"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. Many people have been rushing to borrow the last pennies possible on their homes. They have been taking out home equity loans so they can buy stocks and TVs and cars and whatever else their hearts desire at the moment. 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. Once the bank extends a loan of that size, it owns the house at full value. Then, any drop in that value directly causes a drop in the value of the bank's capital. By contrast, when the bank lends only half of the value of a home, its value can drop as much as half, and the bank can still get all of its depositors' money out of the deal by selling the house. With these latest methods of ‘creative financing,' depositors' money is utterly unprotected from market risk."
Those quotes -- and a book full of others like them -- are from Conquer the Crash, which Robert Prechter wrote in 2002. Mind you, the book isn't exactly "obscure," given that it appeared on the New York Times Best-Seller list.
The "opening shot" in the "debate" was fired six years ago. The media have forgotten that. Today, the first person who gets a book on the shelves after the fact gets the acclaim. The irony speaks for itself.
If you haven't read Conquer the Crash, it's not too late. Some of what Bob forecast has yet to happen. The book comes free with a subscription to the Financial Forecast Service.