Was the financial crisis of 2008 about overleveraged assets or was something more fundamental involved?
Clearly, the economy had been propelled to some degree by speculative activity which Alan Greenspan had consciously and deliberately encouraged by keeping interest rates low. Since the real estate asset class is such a large part of the economy, the real estate bubble achieved unbelievable proportions. Everyone from the home buyer to the real estate agent to the bank loan officer to the Wall Street investment banker were involved since the sums of money made were staggering. People were flipping houses like burgers at McDonalds.
But is the fact that oil reached $147/bbl around the same time the economy collapsed just a coincidence? In fact, according to the economist Jeff Rubin, the seeds of the economic collapse were planted earlier when oil went from $35/bbl to $70/bbl:
From January 2004 to January 2006, a doubling in the price of West Texas Intermediate (the benchmark oil price in North America, which is priced at Cushing), from $35 (U.S.) per barrel to $70 per barrel, drove energy inflation through the roof. Inflation, as measured in the energy component of the US Consumer Price Index, soared from an annual rate of less than one per cent to as high as 35 per cent. That, in turn, drove the headline consumer price inflation rate from less than two per cent to almost six per cent, the highest reading since Saddam Hussein lit Kuwaiti oil fields ablaze in 1991.
The Federal Reserve Board had no choice but to follow suit. Pretty soon, not only was inflation at almost 6 per cent, but the federal funds rate was as well. Suddenly borrowing wasn’t free any more, and then, when homeowners couldn’t make the mortgage payments on homes they couldn’t afford in the first place, the whole financial system imploded.
theglobeandmail.com
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If it's true soaring energy prices brought down the economy, it has profound implications for the governments of the world. The federal government can throw as much money as it wants at the economy, and Mr. Bernake can keep interests low as long as he likes, but they won't lead to sustainable economic growth because of the concomitant increase in energy prices.
World governments are on a treadmill. If Net Oil Exports fall, they won't even be able to stand still. |
