Peak oil, subprime loans and poor oversight
At the slimmest edge of his reasoning, I find myself agreeing with that great Kiwi free market apologist, Roger Kerr. Poor oversight has pumped billions of dollars into useless paper assets, primarily property. However, It is entirely disingenuous to blame the government for that. An oil price spike, one of the early symptoms of the onset of peak oil, is popping the bubble and bringing down the free market house of cards. Kerr just refuses to acknowledge the invisible hand of fear and greed in our unregulated marketplace.
Roger Kerr says that tight monetary policy caused the 1929 depression and that easy money is causing this meltdown. He blames governments and heavy handed regulation, claiming that the market, if left to it’s own devices, would not have let this happen.
What’s wrong with his logic? The US Federal Reserve is not the government. It is privately owned by some very wealthy American families and only chartered - at arm’s length from the government - to manage the US banking system. To blame the government for the loose monetary policies behind this massive speculative bubble is ludicrous. Kerr wants us to think that governments did this. They didn’t. In New Zealand, the Reserve Bank is not privately owned, but it too is chartered at arm’s length from government.
In both cases, the government says “It’s not me” by contracting out its responsibilities for reserve bank duties, while at the same time, the big business lobby says “It’s not us, it’s the government”. These same business interests are the ones who insist that only the private sector is capable of managing such affairs.
However you slice it, the historically high price of oil is a major factor in both individual’s and companies’ current cash flow woes. I prefer Carl Etnier’s summary of events:
It may be, however, that the toxic dynamics of a poorly regulated and poorly managed banking industry were sufficient themselves to cause the current crisis, through the following series of steps: Banks made subprime loans with a number of years of low payments followed by a booby trap of ballooning monthly payments. Local banks sold the loans to Fannie Mae and Freddie Mac, which repackaged them into inscrutable financial instruments and sold them to other institutions. When the booby-trapped clauses were triggered, homeowners could no longer afford monthly payments. Defaults on the mortgages dragged down the value of the securities into which they were repackaged. No one understood the paper the institutions were holding well enough to confidently place a value on it, which meant it could not be used as collateral in further loans. And so credit markets froze.
Regardless of the role of energy in the current financial crisis, oil price hikes and shortages due to peaking world oil production are bound to bring about the sort of broad changes in the economy that Kunstler foresees. Right now, for example, gas pumps are largely closed in many parts of the southeast. Hurricanes Gustav and Ike shuttered both oil production and refining, leaving pipelines from the Gulf low on fuel. The shortages are forecast to continue for weeks. They’re likely both to retard the economy in the Southeast now and further push down prices on homes located far from businesses, schools, and churches.
One of the key questions the country faces is whether we will use our remaining wealth and fossil fuel to prop up the past or to transition to a different future. There’s no shortage of ways to fritter away the rest of our fortune.
For me, that is the most important question of the election. Will we use our remaining fossil fuel wealth to prop up the past or to transition to a different future? One look at our billboards shows how the Greens would want to spend our remaining fossil wealth. Roger Kerr wants to fritter it away.
September 30th, 2008 at 5:40 pm
Isn’t it funny how the right wingers start to wake up to the reality when the excrement hits the fan and they see their investments rapidly losing value.
Even Cameron Slater (aka Whale Oil) now comes here, for the first time I can recall, to proclaim his support for at least some Green principles.
Good on you Cameron, but I would like to see our analysis on the US financial crisis. To put it simplisticly, are you more with Dubya, or are you more with the Republican dissenters who killed his package (and, funnily enough, with whom I as a Green agree)?
At the end of the day, people will get hurt. That is inevitable. But is not the lesson that you can’t live forever on debt. This doesn’t bother me, because my total debts are about $500 to IRD, $130 to Mercury Energy, and $185 to Sky TV.
Nothing owed to banks in my case, so I’m sweet.
But if you’ve got a $900,000 mortgage on a $1m property, your pants must be pretty full of poop at the moment!
September 30th, 2008 at 5:43 pm
- “An oil price spike, one of the early symptoms of the onset of peak oil”
How so? What is the economic argument behind this claim? Surely all the evidence is that it was a demand-led spike, not a shortage of supply.
And what about all the other commodities which also spiked? Are you saying we’re witnessing, say, peak corn? Why should we believe that a spike in oil prices has any more significance than a spike in rice prices?
- “To blame the government for the loose monetary policies behind this massive speculative bubble is ludicrous.”
Indeed. The cause of the crisis primarily is not loose money, it is the vast government intervention in the mortgage market using Fannie Mae and Freddie Mac as vehicles to extend mortgages to millions of people who should never had got them. And more than that, actually arm-twisting commercial banks - through the Community Reinvestment Act and the like - to put aside their normal lending criteria and join in the reckless profligacy as a cost of doing business.
- “Kerr wants us to think that governments did this. They didn’t.”
Actually, they did. This is a matter of record, not a matter of opinion. Whatever you might say about the structure of the US Federal Reserve it is the government which controls it and it is the same government which perverted the entire US mortgage market in pursuance of its policy of home ownership for poor people.
And, yes, it’s the same government which has legislated some 60 trillion dollars of unfunded future liabilities in political promises which put this little debacle completely in the shade.
- “Kerr just refuses to acknowledge the invisible hand of fear and greed in our unregulated marketplace.”
Firstly, you’re plainly talking complete nonsense when you say this particular market is unregulated; it is perhaps the most highly regulated in the world. Secondly, you appear to be making the mistake of assuming that businesses suffer from regulation and fight it tooth and nail. In fact, large companies love regulation. They can’t get enough of it. The reason being that it is a barrier to entry. It keeps out the competition. It’s a form of rent seeking at the consumer’s expense.
September 30th, 2008 at 6:19 pm
Bring on the Unfunded future medicare and social security liabilities.
Thats one mega political hot potatoe.
So what should the US do to solve its medicare and social security problems. Should it raise the taxes on the youth, or slash the benefits.
Since the US practises the evil form of government called democracy, the majority will win this means very high taxes for the youth to pay for the baby boomers to live the high life on social security.
September 30th, 2008 at 7:22 pm
“Since the US practises the evil form of government called democracy”
the american system of government is extremely far from democracy. because of the electoral college system if you vote for a presidential candidate who doesn’t win in your state your vote doesn’t count. there is no proportionality and any party apart from the tweedledems and the tweedlepublicans have virtually no chance of any representation at any level.
“this means very high taxes for the youth to pay for the baby boomers to live the high life on social security”
that’s why we should vote for our children and for our planet…
October 1st, 2008 at 9:57 am
wat - the evidence is that supply of oil has been flat since mid 2005, in the face of increasing demand. Whether you want to call that demand led or not, it is still a failure of the market to supply that has caused the spike in prices. It is the global financial contraction that is bringing supply and demand back in balance, for the moment. The broader commodity boom is the result of an overheated world economy. I think its starting to cool though. Nevertheless, our very hungry and bursting world population is going to put a very high floor on any retreat in commodity prices. One day we’ll wake up to the very real physical limits to growth. (Short of moving to other planets) The concept of infinite market substitution is just voodo economic fantasy.
October 1st, 2008 at 11:29 am
Does anyone else think some of Roger Kerr’s arguments are a little dubious?
Like frog, I agree with a fair part of his argument. But this bit really got me scartching my head:
“Other ill-conceived government regulation has played a part. This includes the requirements for banks in the United States (and internationally) to hold specified levels of capital. Critics have argued that they encouraged banks into off-balance sheet securitisation of mortgages and other assets which has been a prime source of the problems.”
So the requirement for banks to hold sepcified levels of capital forced them into dodgy off-balance sheet financial instruments to get around the legsilation. I don’t even see any wings on that piglet.
Can someone please try and explain why this makes any more sense than a claim that the IRD’s reckless imposing of tax rates on us causes all the tax avoidance we see.
October 1st, 2008 at 11:55 am
Wat
Not to put too big a spike in your cannon here but… the “Federal Reserve Bank” is not run by the government. Its charter leaves it rather independent of the Congress and the President.
http://www.federalreserveeducation.org/fed101/structure/
The bankers are in charge of this.
Any idea that this is due to over-regulation is simply delusional and that fits my usual opinion of Roger Kerr’s rants. You might as well say that it is that darned gravity that makes me overweight.
As for the “encouragement” of home ownership, that was never a problem until the completely UNREGULATED CDS multipliers hit the system and the ideological antipathy to actually controlling the greed of the pseudo-capitalists prevented the US government of the day from doing anything to stop it.
There is no such thing as the ideal capitalist free market, anywhere. It’d be nice if realism were made part of the thought processes
BJ
October 1st, 2008 at 11:59 am
http://andymarlette.com/NATIONALS/2008.09.23wwjd2.gif
October 1st, 2008 at 12:02 pm
We didn’t see this on the news either, did we. I wonder why?
http://jessescrossroadscafe.blogspot.com/2008/09/bailout-bill-fails-in -house.html