There Is No Avoiding an Historic Bust

There Is No Avoiding an Historic Bust

It was the ‘90s, speculation in new technology was rife. One prospectus offered investors a return of 100%.

Edward Chancellor (an economic historian) wrote an excellent book on the history of financial bubbles, Devil Take the Hindmost: A History of Financial Speculation. Let’s see an excerpt from that book…

Then it ended. A crisis in public finance, a flight of foreign investors and a loss of investor confidence sank the prices of the leading companies.

I know what you’re thinking, ‘so what’s new, we know that story from the 1990s.’

But the ‘90s I’m referring to was not the 1990s — it was the 1690s.

As told by Chancellor:

…the British public drove up the prices of shares in diving companies, which bragged of new technologies for searching the sea floor for sunken treasures. One prospectus assured investors of a 100 percent return. The public’s thirst for quick riches spilled over into shares of companies ranging from those with new patents for burglar alarms or fire-extinguishing engines to banks and the bellwether East India Company.

Speculation in something new and exciting.

Bubbles forming.

Justification found in that old chestnut…‘this time is different’.

Busts following.

Regrets aplenty.

Same pattern. Different eras.

People never learn…especially those charged with the responsible stewardship of the financial system.

Edward Chancellor’s latest book, The Price of Time: The Real Story of Interest, is highly critical of the modern-day central banker.

Chancellor’s forensic account of history’s bubbles and busts finds there is one common denominator…they always happen when interest rates have been kept too low for too long.

In a recent interview, Chancellor had this to say on the current ‘everything bubble’.

After years of ultra-low interest rates, central banks created a bubble in pretty much every asset class, they facilitated a misallocation of capital of epic proportions, they allowed an over-financialization of the economy and a rise in indebtedness.

Bottom line, the bust has only just started. This is going to end really badly.

But how did the…

Fox take charge of the Hen House

More than 116 years ago, a devastating natural disaster put into motion the events that’ll cause the most devastating financial disaster in history.

In April 1906, San Francisco was struck by an earthquake that killed upwards of 3,000 people and destroyed more than 80% of the city.

Insurance companies in Britain were hit by massive claims.

Settlement of these claims required large amounts of gold to be moved from London to the US.

In an effort to stem the outflow, the Bank of England raised its discount rate to make it more attractive to keep gold in Mother England.

It worked. Gold flowed back from the US to England.

The tighter monetary conditions in the US resulted in one of the worst bear markets in US history.

In 1906–07, Wall Street fell 48%.

We’ll let Wikipedia tell the rest of the story…

Panic occurred, as this was during a time of economic recession, and there were numerous runs on banks and trust companies. The 1907 panic eventually spread throughout the nation when many state and local banks and businesses entered bankruptcy. Primary causes of the run included a retraction of market liquidity by a number of New York City banks and a loss of confidence among depositors, exacerbated by unregulated side bets at bucket shops.

Without a central bank to restore calm, it was up to the most powerful banker of the day, John Pierpont Morgan (yes, the original JPMorgan) to save the day, and stabilise the system.

An angry mob is the ideal pretence for powerbrokers to implement their agenda.

Fat Tail Investment Research

Source: US Federal Reserve

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The 1907 Panic was the crisis needed by the bankers to force US Congress to establish the US Federal Reserve Bank.

As noted in the US Federal Reserve’s history archives:

The Panic of 1907 was the first worldwide financial crisis of the twentieth century. It transformed a recession into a contraction surpassed in severity only by the Great Depression. The panic’s impact is still felt today because it spurred the monetary reform movement that led to the establishment of the Federal Reserve System.

Under the guise of ‘we need a stable financial system to protect the people’, the bankers and politicians went to work on drafting up a central bank model.

More than five years after the Panic, the US Federal Reserve Bank was legislated into existence in December 1913.

During this five-year period, there was another panic in 1910–11 (emphasis added):

The Panic of 1910-1911 was a slight economic depression that followed the enforcement of the Sherman Anti-Trust Act. It mostly affected the stock market and business traders who were smarting from the activities of trust busters


The 1910–11 panic did not create a bank run.

So, without another threat to the banking system after the Panic of 1907, why did the bankers and politicians persist with plan? Why not let the system work itself out?

The real story is in the fine print

That’s where the Motherhood statements tell the story.

The big picture plan, according to the Fed’s own site, was (and still is):

The Federal Reserve works to promote a strong U.S. economy. Specifically, the Congress has assigned the Fed to conduct the nation’s monetary policy to support the goals of maximum employment, stable prices, and moderate long-term interest rates.

Who doesn’t want maximum employment, stable prices, and moderate interest-rates?

Sign me up.

As always, the real objective can be found in the fine print.

The US Federal Reserve Bank is made up of 12 regional banks…St. Louis Federal Reserve, New York Federal Reserve, San Francisco Federal Reserve, etc.

To quote from the Fed’s own site (emphasis added):

…each of the 12 Reserve Banks operates within its own particular geographic area, or District, of the United States, and each is separately incorporated and has its own board of directors. Commercial banks that are members of the Federal Reserve System hold stock in their District’s Reserve Bank. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. In fact, the Reserve Banks are required by law to transfer net earnings to the U.S. Treasury, after providing for all necessary expenses of the Reserve Banks, legally required dividend payments, and maintaining a limited balance in a surplus fund.

What this all means in layperson terms is that every commercial bank, by law, is required to keep 6% of its capital in its regional reserve bank.

In exchange for these reserves, the commercial bank is issued with an equivalent number of shares. Naturally, the bigger banks — like JPMorgan, Citibank, et al. — are allocated a greater number of shares.

The price of these shares is fixed at US$100.

The shares carry voting rights to about two-thirds of the board of directors for that regional reserve bank.

But here’s the good bit:

‘…the Reserve Banks are required by law to transfer net earnings to the U.S. Treasury, after providing for all necessary expenses of the Reserve Banks, legally required dividend payments…’

One of the expenses of the regional banks is…legally required dividend payments.

The shares held by the commercial banks are entitled to a dividend of 6%.

The Panic of 1907 was the Trojan Horse for the bankers to establish a system that’s been very beneficial to the banking sector…voting rights on the regional Fed banks, and a guaranteed 6% dividend.

Has the Fed delivered on its Charter?

Stable prices…read the highlighted section…

Fat Tail Investment Research

Source: Visualizing Economics

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History indicates the period prior to the Fed’s creation (when market forces corrected any excesses) was far more stable over the longer term.

Moderate long term interest rates…I won’t even bother with that chart.

Zero bound for over a decade…that’s NOT moderate, it’s punitive.

The Federal Reserve system, designed by bankers, to be run by bankers, for the benefit of bankers, has, under the pretence of offering greater stability, created an immeasurable level of instability.

Rampant speculation. Derivative contracts priced in the hundreds of trillions of dollars. Record debt. Historically low rates. Unfunded welfare and pension promises. Unfettered money creation.

Our economic growth is a fraud built upon one giant (central bank cultivated) lie — that we can have our cake and eat it too.

We have generations who now believe…

Share markets will rise forever. House prices can never fall. Generous retirement income promises will be kept. Why save for tomorrow, when you can borrow today?

The Fed’s charade of prudent stewardship was briefly revealed to all in 2008.

The cracks in the central bank’s veneer of responsible management were quickly papered over with QE and ultra-low rates.

Curing a debt crisis with more debt, must surely rank as one of the stupidest policy settings in modern history. Yet, as a society, we bought it.

Why? Because the so-called pillars of our society, the banks, sold it to us.

These are the very same banks that are in on the Fed’s scam.

Applying even greater stress to a system that was already showing signs of strain, has only served to further weaken the foundations upon which our financial structures are built.

Yes, there has been one hell of an asset price party. Which, when you think about it, is only fitting. All great dramas have a final, spine-tingling crescendo before the tragic ending.

A seismic shock awaits

The widespread instability now embedded within the system, guarantees a man-made seismic shock in financial markets — far worse than 2008 — is in our future.

When that, ‘who-could have-predicted-that-crisis’ next occurs, watch for the bankers to once again lobby to implement a system (under the guise of needing to restore stability) that favours their interests, not ours.

We know they’ll try to sell it to an unsuspecting and gullible public as being in our best interests. Different era, same game plan.

Will the public be so naïve this time around?


But don’t discount the possibility of angry people taking to the streets to protest the graft, corruption, and inside trading that’s become endemic within the banker’s bank — the Fed.

The bust that’s coming is going to be history making…providing Edward Chancellor with a treasure trove of material for his next page turner.

Sadly, for far too many people, the lessons will be learnt too late.

Which means regrets aplenty.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Daily Reckoning Australia