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M = Market Direction: How You Can Determine It 229

ful rebound off the ultimate bottom. So they may try to shift their emphasis
to big-cap, semidefensive groups.

The Fed Crushes the 1981 Economy. The bear market and the costly, protracted
recession that began in 1981, for example, came about solely because the
Fed increased the discount rate in rapid succession on September 26,
November 17, and December 5 of 1980. Its fourth increase, on May 8,
1981, thrust the discount rate to an all-time high of 14%. That finished
off the U.S. economy, our basic industries, and the stock market for the
time being.
Fed rate changes, however, should not be your primary market indicator
because the stock market itself is always your best barometer. Our analysis
of market cycles turned up three key market turns that the discount rate did
not help predict.
Independent Fed actions are typically very constructive, as the Fed tries
to counteract overheated excesses or sharp contractions in our economy.
However, its actions and results clearly demonstrate how much our overall
federal government, not our stock markets reacting to all events, can and
does at times significantly influence our economic future, for good or bad.

The 2008 Financial Collapse. The subprime mortgage meltdown and financial credit
crisis that led to the 2008 market collapse can be easily traced to moves in
1995 by the then-current administration to substantially beef up the
Community Reinvestment Act (CRA) of 1977. These actions mandated
banks to make more higher-risk loans in lower-income areas than they
would otherwise have made. Failure to comply meant stiff penalties,
lawsuits, and limits on getting approvals for mergers and branch expansion.
Our government, in effect, encouraged and coerced major banks to lower
their long-proven safe-lending standards. Most of the more than $1 trillion
of new subprime CRA loans had adjustable rates. Many such loans eventu-
ally came to require no documentation of the borrower’s income and in
some cases little or no down payment.
In addition, for the first time, new regulatory rules not only allowed but
encouraged lenders to bundle the new, riskier subprime loans with prime
loans and sell these assumed government-sponsored loan packages to other
institutions and countries that thought they were buying safe AAA bonds.
The first of these bundled loans hit the investment market in 1997. That
action allowed loan originators and big banks to make profits faster and
eliminate future risk and responsibility for many of those lower-quality
loans. It let the banks turn around and make even more CRA-type loans,
then sell them off in packages again, with little future risk or responsibility.