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Location: I live between Myrtle Beach SC and Raleigh NC.
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First let me say I am not an educated man in the ways of the financial world by any means. However I do see a correlation between the housing meltdown and the price of gas and the current recession. I seem to remember everything going along smoothly and then a sudden rise in gasoline prices. Shortly after that the housing crisis blossomed due to bad loans they tell us. I happen to believe that the gas crisis was the root cause of this problem. Am I that far off? If I were to look hard enough I am sure there are charts out there that correlate the rising costs of energy with the housing bust. Comments?
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
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I wouldn't call it a cause, that was clearly the inflated home prices and bad mortgage loans. Higher gas prices simply added to the burden for those already struggling to meet their debt. Note that the lowest gas prices in the last 6 years were right when this started, 2008. I suspect that oil companies have great economists who predicted the coming crisis
and decided to raise prices to take advantage before the demand fell with so many people out of work and not commuting.
We have brewed up ourselves a perfect economic storm--the main thrust of it yet to strike us. Piece number one is our appetite for cheap oil--in a world with declining cheap-to-produce oil reserves, that is a disaster in the making right there. Piece number two in the puzzle is the housing bubble. One of its largely unremarked side effects was to suck up (then destroy) a lot of this country's capital in what amounts to useless consumption. Those two pieces set up the third stage--a situation where we must somehow adapt to a world with much higher petroleum prices when we have little capital to invest to make ourselves more energy-efficient. No doubt someone will point out all the cash that corporations and financial institutions are holding right now and they will conclude, incorrectly, that there is no shortage of capital in this country. Truth is, that cash is being held for a very good reason by very intelligent people--they recognize that there are huge losses coming in the de-leveraging of the American economy that will likely take all of that cash, and more, to survive before it is all done.
If you think the housing bubble is about deflated, imagine what all that suburban crap housing will be worth when gasoline is $8/gallon. As the British would say, "Not bloody much." Since most Americans live in that mess we call suburbia (and have most of their personal capital invested in it), the socio-economic pain that they will endure when that final de-leveraging happens will eclipse just about anything we've seen in this country since the Civil War.
I think so, and it makes sense considering oil is THE commodity that makes today's civilization possible.
The economy craps out every time oil gets high, then it drops back down and we do better, then oil creeps up and the economy craps out again.
Just a coincidence? I think not. Every civilization has something that can (and often did) bring it all crashing down, and oil is clearly our "Achilles Heel"
First let me say I am not an educated man in the ways of the financial world by any means. However I do see a correlation between the housing meltdown and the price of gas and the current recession. I seem to remember everything going along smoothly and then a sudden rise in gasoline prices. Shortly after that the housing crisis blossomed due to bad loans they tell us. I happen to believe that the gas crisis was the root cause of this problem. Am I that far off? If I were to look hard enough I am sure there are charts out there that correlate the rising costs of energy with the housing bust. Comments?
No. Not related. The housing crises was set off by 2 things: sub prime loans that had low initial rates and by housing inflation that priced most Americans out of the housing market and made renting a much better option. Gas prices always fluctuate. In the 70s gas prices were sky high and there were lines for gas and odd/even rationing. The housing market was not dented a bit.
I think so, and it makes sense considering oil is THE commodity that makes today's civilization possible.
The economy craps out every time oil gets high, then it drops back down and we do better, then oil creeps up and the economy craps out again.
Just a coincidence? I think not. Every civilization has something that can (and often did) bring it all crashing down, and oil is clearly our "Achilles Heel"
Seems like a correct observation.
Should see this repeat all the way down the falling production curve.
Only thing you really have to know is that the first one off Oil -- wins.
Its actually all related. Unlike today's trash crap economic theories that lets juice from a raw chicken run into the salad greens, the honorable geniuses of classical economics separated freebie fixed wealth from capital according to the labor theory of capital which can be expanded by human production. Pottery is theoretically in endless supply given an equal amount of clay. Clay in this example is not in classical economic theory capital but it is a valuable natural asset. The collection of this free value is known as economic rent.
Those that use their monies and leverage to buy the clay(land, water, natural monopolies, the best place to build a road and minerals), that tend to be fixed in nature, are looking for a free lunch. Land is especially the case since it is inherently monopolistic being uniquely near something. A square mile in Manhattan has enormous value. Much of this value however is free and unearned since it is the hub built around it that has created this value.
Most of the money is in pursuit of this leaching income in a race to buy it before productive labor and capital can get it, driving up all our prices. So the price of oil and housing is related as wealth destroying economic rent seeking. Its why trickle down economics is a joke.
Recessions are necessary because lending is always a negative-sum game.
Take a balanced monetary system with no inflation (or deflation.) As soon as lending begins the persons doing the lending will seek to profit. As such they will charge an interest rate that reflects (1) time value of money, (2) the inflation rate (zero in this case) and (3) the risk of not being paid plus (4) a profit.
Time value is of course real, and this means that in aggregate the lending is "overpromised." If the other factors accurately reflect risk and profit is sought then by definition the total of interest to be paid will exceed the growth in GDP generated by the lending.
This means that someone's not going to get paid!
Well, when someone doesn't get paid then both a borrower and lender go bankrupt. That is economic contraction -- recession.
Attempting to short-circuit this process is extremely damaging as doing so forces an ever-larger amount of lending to take place in order to prevent the defaults. That's a ponzi as it an ever-expanding exponential series.
This is something I've pondered for a long time. I know how much the sharp spike in gas prices cost me and my ultimate reaction was to cut back in other areas. When I went from putting $25 a week into my tank up to $60 It hurt my lifestyle a bit. It immediately pulled close to $2000 a year out of what I spend on goods and entertainment. Clearly $2000 isn't much but multiple that by a couple of hundred thousand people and you can see how the economy would suffer.
Do that in a small town and you can see how small businesses would close up and go out of business. Get gas back to $2.00 a gallon and I bet the economy will come rushing back ini a big hurry.
I personally think the housing collapse would have happened either way. Here in and around Chicago housing prices got out of hand about 5 - 6 yrs ago. I remember looking at 2 bd rm homes in the burbs for $500K+. Today those same homes are below $200K. It all happened too fast and for no real reason.
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