The title of this article could be used to illustrate the primary delineation between Austrian and Keynesian schools of economic thinking. Austrian proponents believe that any credit driven economic expansion must be followed by a natural period of contraction. Misallocated capital creates excesses in the system (malinvestments) that must be purged in order for the system to function properly. Keynesian proponents believe strongly that increasing liquidity during a contraction period will lessen the pain associated with natural processes. We hope to show you that the Austrians are right and the actions of the Keynesians controlling your banking system have consequences, the effects of which you will be borne by you.
The behaviors which caused our current condition trace back to 1998. Like much of the cancer which has taken over our economic system, the perpetrators originated from Solomon Brothers. A group of former "Solly" traders formed Long Term Capital Management (LTCM) in 1994. Ironically, there was nothing long term about their investment intentions. The firm used excessive leverage to exploit small differences in the net present value of sovereign fixed income obligations. Ultimately, a collapse of the Russian ruble caused the firm's demise. LTCM had been funded by powerful, connected interests in New York and around the world. When the firm collapsed suddenly, certain stakeholders felt they should not bear the full consequences of their investment decisions. A meeting of the privately owned Federal Reserve Bank of New York was summoned and a quasi bailout was arranged. The public was told that this action was essential to protect the stability of the entire financial system. In reality, a new era had begun. Connected New York firms could now use excessive leverage to maximize profits with the assurance that losses would be pushed onto the public.
Within 12 months, we were in the midst of a speculative bubble which concentrated capital in the burgeoning technology sector. By the first quarter of 2000, this bubble was exploding. Hot money flows had pushed equity valuations to levels possible only when excessive credit floods a system. After September 11th, the system was again flooded with excess credit. This time the hot money flooded into housing. Buyers with marginal credit were encouraged to speculate in illiquid housing markets with down payments as low as 0%. Connected banks had created this situation by providing the credit needed to fuel the boom. They garnered transaction fees from every part of the loan process. Once the loans were issued, they generated fee income for packaging the loans into large investment products. They profited from the sale of these products at inflated prices. Finally, knowing that the underlying credit quality was poor, they bought insurance against a loss in value of these products even though they did not own them.
When Lehman Brothers was frozen out of overnight credit markets in 2008, the over-leveraged system hit a wall. Banks balance sheets were badly damaged and a natural bankruptcy process was in order. Again, the privately held central bank pushed responsibility onto the public. We remain in a period of stagnation caused by the favorable treatment of connected banks at the expense of the citizenry.
We write this so that you may begin to understand the pattern of these events. Please research what we have discussed and learn the truth behind history for yourself. There is no conspiracy at work in the financial markets; this happens in plain sight. The conspiracy is in how the information is delivered to you. Their playbook involves convincing you that the actions were required to insure your safety.
Learning to think for yourself and make up your own mind could be what saves your balance sheet from the next round of privatizing profits and publicizing losses.