The Credit Crack Up

Jupiter, Fla. (PRWEB) April 23, 2008 -- Martin D. Weiss, Ph. D. discusses America's credit woes and three official reports on the credit crisis. Dr. Weiss examines each of these reports further.

Until recently, economists have had only anecdotal evidence of credit troubles. They knew that individual banks were taking losses. They knew that many banks were tightening their lending standards. And they realized that there were glitches in the credit markets. So they referred to the essential slowdown in the pace of new credit growth as the "credit crunch." But investors didn't buy that. In early 2008, they were warned that America's credit woes involved much more than just a slowdown. The Money and Markets gurus wrote that it was actually a credit crack-up, an outright contraction of credit the likes of which had never been witnessed in our lifetime. No one had seen anything like this happen before. Indeed, three new official reports are now saying that the credit crack-up is already beginning.

The Federal Reserve is reporting a big contraction in short-term debts. Based on its Flow of Funds Report, it states:

- In the third quarter of 2007, "open market paper" (mostly short-term commercial loans) was slashed at the annual rate of $682 billion;

- In the fourth quarter, it shrunk again at the rate of $337 billion per year;

- And this shrinkage doesn't even begin to reflect the impact of the Bear Stearns failure or the huge additional bank losses announced so far this year.

This is an actual reduction in the short-term loans outstanding which implies a rupture in the nation's credit market and which could deliver a new shock to the U.S. economy. If this represented a planned and voluntary effort by lenders to begin trimming America's debt excesses, it might actually be a good thing. But that's not the case here. This debt reduction is almost exclusively forced on lenders by the pressure of events: The plunging value of mortgages, the surging defaults by debtors, and the huge losses that have caught both banks and regulators off guard.

Also, the Comptroller of the Currency (OCC) is reporting havoc in the derivatives market. Derivatives are bets and debts placed by banks and others. In recent decades, derivatives have grown far beyond any semblance of reason. But in its latest report, the OCC reveals that in the fourth quarter of 2007:

- For the first time in history, the notional value of derivatives held by U.S. commercial banks plunged dramatically by $8 trillion;

- For the first time in history, U.S. banks suffered a massive overall loss on their derivatives of $9.97 billion;

- And these numbers do not yet reflect this year's disasters at Bear Sterns and other institutions.

Until the third quarter 2007, U.S. commercial banks had been making consistent profits from their derivatives quarter after quarter. Their total revenue from these and related transactions never dipped into negative territory, rarely suffered a significant decline, and was even making brand new highs through the first half of 2007.

Then, suddenly, in the fourth quarter, for the first time ever, U.S. commercial banks lost big money in derivatives in the aggregate. The OCC specifically states in its report that the sudden and unusual reduction in derivatives was due entirely to the turmoil in the credit markets.

"And the International Monetary Fund (IMF) predicts that this crisis is barely one-third over. In its Global Financial Stability Report the IMF predicts that the total losses from the subprime and related credit crises could reach $945 billion, or more than triple the already-huge losses that have been announced so far," Dr. Weiss states.

To read this issue online, please visit:

http://www.moneyandmarkets.com/Issues.aspx?A-Monumental-Change-1686

About MARTIN D. WEISS & MONEY AND MARKETS     

Martin D. Weiss, Ph.D., founder and president of Weiss Research, Inc. and a leading advocate for investor safety, is a nationally recognized expert on domestic and international financial markets. With more than 35 years of experience, including many years in Latin America and Asia, Dr. Weiss has helped empower millions of investors to make better financial decisions through his monthly Safe Money Report and daily Money and Markets.

Dr. Weiss' keen understanding of foreign markets and the global economy has earned him a reputation for thoughtful, in-depth analysis that investors can rely upon to make informed financial decisions. Regularly called upon by the media for his independent investing guidance, he has been featured in publications nationwide, including The Wall Street Journal, The New York Times, Chicago Tribune, Investor's Business Daily, and Forbes and has also appeared on CNN and CNBC.

Throughout his career, Dr. Weiss has been an advocate for consumers and investors in the insurance, banking and brokerage industries, dedicating his time and resources providing analysis and data for Congressional testimony, constructive proposals for reforms in the securities industry and legislation for full financial disclosure as well sound accounting and fiscal policy. In November 2004, he launched the Sound Dollar Committee, a nonprofit organization dedicated to building a network of investors seeking to protect the nation's future by demanding honesty in government accounting, a balanced budget and sound economic policy.

Dr. Weiss is author of The New York Times best-seller, The Ultimate Safe Money Guide, which gave baby boomers a road map to grow their wealth safely. It was listed on the New York Times Business, Wall Street Journal, and BusinessWeek best-seller lists, as well as the Barron's Roundup for 2002.

Dr. Weiss holds a bachelor's degree from New York University, a Ph.D. from Columbia University and is fluent in eight European and Asian languages.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.

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