Boom and Bust

Boom and bust is the pattern in which an economy, a sector or a market grows unusually fast for a period, often on rising credit and optimism, and then contracts sharply as the excesses unwind. A "boom" is the phase of rapid expansion in output, lending, investment or asset prices; the "bust" is the slump that follows. The phrase is used for whole national economies, for property and stock markets, and for commodity-dependent regions such as oil towns.

Boom and bust is a sharper, more violent version of the ordinary business cycle. It often involves an economic bubble in asset prices, and the turn from boom to bust is sometimes called a Minsky moment. Policymakers, especially central banks and financial regulators, try to dampen the pattern rather than eliminate it.

Picture a town where a new mine opens. Wages rise, people move in, builders put up houses as fast as they can, and banks lend freely because everyone seems to be doing well. Some of that building only makes sense if the good times last forever. When the ore price falls or the mine closes, half-built houses are left empty, builders go bust, and the banks that lent to them are in trouble.

A national boom and bust works the same way, only on a bigger scale. The boom is real while it lasts, but it encourages spending and borrowing that only pay off if it continues. The bust is the painful correction when it doesn't.

Most booms that end badly share a sequence, though each has its own trigger:

1. A genuine start. A new technology, a commodity discovery, financial liberalization or low interest rates create real profit opportunities.
2. Credit growth. Banks and other lenders extend more loans; credit expansion lets households and firms spend and invest beyond current income, and leverage rises.
3. Rising prices and confidence. Asset prices climb, which raises collateral values and allows still more borrowing; speculation spreads, helped by optimistic animal spirits.
4. The turn. Rates rise, a large borrower fails, or prices simply stop rising. Lenders pull back and a credit crunch sets in.
5. The bust. Forced selling, falling asset prices and job losses reinforce each other, often producing a recession and sometimes a banking crisis.

The pattern recurs across centuries and countries:

• Britain's Railway Mania (1840s). A rush of railway company promotions and share buying was followed by a collapse in share prices in the late 1840s.
• The Roaring Twenties and 1929. A US stock and credit boom ended with the 1929 crash and the Great Depression.
• Japan in the late 1980s. Land and share prices soared, then collapsed after 1990, followed by years of stagnation.
• Emerging-market lending booms. Heavy foreign borrowing ended in the Latin American debt crisis of 1982 and the Asian financial crisis of 1997, often worsened by sudden reversals of hot money and capital flight.
• The dot-com and housing busts. Technology shares collapsed in 2000–2002, and the US housing and mortgage boom ended in the 2008 financial crisis.

Commodity exporters live with their own version through the commodity cycle: oil prices peaked near $147 a barrel in July 2008 and fell below $40 by the end of that year, hitting budgets from the Gulf to Nigeria and Venezuela.

Economists disagree about why booms overshoot. The Austrian school argues that interest rates held below their natural level by central banks encourage investment that cannot be sustained, so the bust is a necessary correction. Keynesian economists focus on swings in confidence and spending, and argue that the bust can leave unemployment high for years unless policy steps in. Hyman Minsky's financial instability hypothesis holds that long periods of stability themselves encourage riskier borrowing. Supporters of the efficient market hypothesis are more sceptical that booms can be identified as mistakes in advance. Each view leads to different policy advice, from staying out of the way to aggressive intervention.

Since 2008, regulators have added tools aimed directly at credit booms. Under the Basel III framework, banks can be required to hold a countercyclical capital buffer when credit grows unusually fast, and many countries cap loan-to-value or debt-to-income ratios on mortgages as part of macroprudential policy. In the bust, central banks act as lender of last resort and cut rates, while governments may use fiscal policy to support demand. Critics warn that rescues create moral hazard, encouraging the next boom, while others argue that letting busts run their course risks an economic depression.

• Bank for International Settlements: The financial cycle and macroeconomics (Working Paper 395)
• Federal Reserve History: Stock Market Crash of 1929