The Boom and Bust Cycle: A Financier's Best Friend


23 November 2009. In our last few articles, we have analyzed how the Fed is a private bank, how the Fed and other banks literally create money out of thin air, and how the system is designed to keep the banks intact over and above protecting the government or economy, with a heads-I-win tails-you-the-taxpayer-pay philosophy.

Today we are going to take a deeper look into the boom and bust cycle, as this is a key part of how financiers increase their control and wealth.

We accept booms and busts as simple facts of life. As consumers and as business people we can understand as the Law of Supply and Demand, we think of it as being systemic. This quasi-religious orthodoxy has led us to believe that booms and busts are an essential part of efficient markets, when in fact they contain many man-made (ie banker-made) elements.

Take for example a craze that was popular for a while in Taiwan, Singapore and a few other Asian countries, and eventually spread to Canada and parts of the US: Bubble Tea.

Someone invents Bubble Tea. It becomes popular, maybe because a celebrity starts drinking it, or some kids get into it and a journalist notices it, or nowadays it starts to get Tweeted or posted on Facebook.

Suddenly everyone wants Bubble Tea. Queues form, supplies start to run out, the demand is rampant.

Thinking that Bubble Tea is the next big thing, the current providers get financing to expand, budding entrepreneurs think ‘this is it!’ and open new outlets (with variable quality and price levels), and suppliers ramp up production of raw materials, packaging and other services.

Pretty soon there are Bubble Tea outlets everywhere. For a while, everyone in Bubble Tea Land feels rich, or is working hard to become rich within the next months or years.But then, oh dear, there is a problem.

People start to grumble that the good places have queues, and the bad places are, well, bad.

Even worse, uncool people are now drinking Bubble Tea (after all, who wants to friend their parents on Facebook?).

So the cool people get out of BubbleTeaonia, and start to hang out in cooler places, like dry docks and airline repair hubs, and start drinking engine cleaning fuel.

Then the celebs and journos notice. One of two things happens now. Either the new things becomes a boring mainstream business (such as BreadTalk did with its pork floss bun craze in the same region), or the whole fad dies, as Bubble Tea did.

All those paper Bubble Tea millionaires who dreamt of their first yacht now either have to scramble to create a new business, or they are toast. Many such entrepreneurs get crushed by debt, or thrown onto the refuse dump of the bankruptcy process. If you have been there or are going there – since we are in the bust cycle – you have our sympathy.  Remember that this is not the end, you can restructure yourself out of that place - that is what you must focus on now.

You probably think of boom and bust in this way. I know I normally do. Economy is good, we all go out and shop. Economy is bad, we all stop spending. Good = jobs and price rises. Bad = redundancies and price drops.

Now let’s flip the board game around, and sit in the bankers seat. What does it look like when you are the financier?

In the boom times, things are great. You loan money out to government, businesses, investors and consumers, and they pay you various rates of interest. When times are good, the Fed (whom the taxpayers mistakenly believe to be a government regulator, when in actual fact it is a private bank of which you, a named banker, are a shareholder) and other central banks (some government controlled, some private) raise interest rates, so you make good returns.

But what happens during a bust?

When your debtors can no longer pay back the interest you demand – that is, when they default on a debt – you have recourse to their assets. That’s right, what was theirs becomes yours.

Depending on how tight the squeeze is that is placed on the economy and how long the bust cycle lasts for – many years for the current depression in the US and Europe – you need to be able to stay in the game while assets lose value before they come back up, or while they are illiquid – meaning there is no-one who will buy them. If you can do that, you will have loaded up on assets that cost you pennies in the pound. Once the economy recovers and markets become liquid again, you can make a killing either selling those assets or renting them out through mortgages or other secured loans to a whole new round of suckers. Or even better, you can create fancy structured products like Collateralized Debt Obligations (CDOs), earning vast fees while shifting risk onto

The key to this high finance party trick is being able to stay in the game through the crunch. That way, as banker, you are untroubled by recessions. In fact, you positively relish them.

The Fed, and central banks in general, were created specifically to support the private banking system (and not to support citizens or the economy as we had thought), which means helping them to survive through downturns.

If behind-the-scenes actions are not enough, you are likely to get a government bailout or other government support or guarantees to keep you solvent. That is, unless you upset, threaten or just plain annoy some entrenched interests, as Dick Fuld of Lehman Brothers did – but that is another story for another day.

You will get public support, at least grudgingly, because everyone’s jobs, pensions and houses are tied up in the system, so everyone wants to get back to boom as quickly as possible. Which means, of course, helping the banker.

That is why boom and bust is the long-sighted banker’s best friend. The beauty of it is that it is based on supply and demand, and the inherent ambition, greed and fear of the human species. Financiers don’t need to create those things – they just need to amplify them, and then sit back and build their financial fortresses.

Astute observers will have noticed that billions of dollars of bailouts and other government aid have not led to a significant reduction in the rate of foreclosures. Banks are collecting vast swathes of assets on the cheap.

There are ever more ingenious ways for smart money-men to profit from this seeming catastrophe.

The New York Times has reported on a remarkable new scheme where Funds Profit by Reducing Mortgages.

That’s right, the funds are reducing the principal involved, the core loan amount that a homebuyer has taken out, and making a killing. How does this work?

The funds are buying billions of dollars worth of mortgages that have been discounted from their original values. They reduce the size of the mortgages – in order that they can qualify for refinancing by government agencies such as the Federal Housing Administration, who are trying to keep in homes.

All well and good – but then the funds resell these new, government-insured loans to other agencies, such as Freddie Mac and Fannie Mae, pocketing handsome fees in the process.

And the real big win? The risk is now all borne by the taxpayer.

Howard Glaser, a financial industry consultant, is quoted as saying,

From the systemic point of view, there is something disturbing about investors that had substantial short term profit in backing toxic loans now swooping down to make another profit cleaning up the mess.

Cleaning up the mess, we might add, by creating an even bigger taxpayer liability.

Now you may be thinking hold on a minute, it is unfair to blame the bankers. After all, regional banks don’t always have the muscle to push through, and they are being closed down in record numbers.

But this is not about regional banks. They are suckers like the rest of us. They can bow-tied and delivered to larger banks with federal guarantees, just like the mortgages. The weak stutter, the strong hoover up the remains.

This about the top bankers who wield more power than Prime Ministers and Presidents. And even more so, this is about the major hereditary bondholders behind them, who are more important than Kings and Queens.

After all, they have financed both sides of the war when Kings, Presidents and Prime Ministers fight each other.

Like Nathan Meyer Rothschild, the banker funded the British War effort, and who knew in 1815 that Napoleon had fallen at Waterloo 20 hours before the British court did. He spread the rumour that Napoleon had won, watched stocks fall by up to 90%, bought half of England, then watched them rocket once it was realised that the British had beaten France and won dominion over the seas.

By 1825, he had grown so rich that he could supply enough gold bullion to the Bank of England to avert a Financial Crisis. Of course he was the major shareholder in the Bank of England. All across Europe, and later in the US, his brothers and agents performed similar tricks.

That is what caused Abraham Lincoln to say during the American Civil War

The money powers prey upon the Nation in times of peace, and conspire against it in times of adversity. I have two great enemies, the Southern army in front, and the bankers in the rear, of the two the one at the rear is my greatest foe, if they win the Republic is finished.

Today, as assets will plummet in value, remember they will eventually regain and surpass their previous boom time valuations. Ask yourself, who will be minting it when that happens?

Keith Timimi