Blogs > HNN > OIL PRICE, NOT SUBPRIME LOANS, BROKE US CONSUMERS

Nov 23, 2008 11:37 pm


OIL PRICE, NOT SUBPRIME LOANS, BROKE US CONSUMERS



Last week Tom Friedman urged his readers to go shopping. This week he tells them to eschew restaurant food in favor of a home made tuna fish sandwich. In other words, Friedman suggests that it is time to panic. Why? Because the US is filled with W.M.D. called subprime mortgages. I beg to differ.

Subprime mortgages are a problem but they are not the cause of the collapse. The collapse was caused by an OPEC generated precipitous rise in oil prices. Subprime mortgage buyers could no longer pay their mortgages because too much of their pay check had to go to pay for gasoline. Yes, I know, gas prices have since declined but not before Humpty Dumpty, the American consumer, was broken.

Much of the economic development around the world rested on the willingness and ability of the American consumer to absorb a large portion of the excess global production especially from emerging markets. It was the role of the producing nations to enable the American consumers to fulfill its role, i.e, live above its means, by lending it the needed funds. All subprime loans did was to encourage poor people to join the national spending spree. The hope was that emerging markets consumers will slowly begin to follow in the footsteps of their American brethren enabling a careful rebalancing of the global economy.

Indeed, when Oil rich nations decided to squeeze the American consumer by not only raising oil prices but also by ending or lowering their investment in the American financial markets, they assumed that there were enough new consumers in Asia to replace the American ones. In other word, they assumed that the collapse of the US economy would not lead to the collapse of the global economy, most especially, the Asian one.

They were wrong. Instead of proving that the world no longer needed Americans and their dollars, they ended up proving that the US and its consumers were needed more than ever. Just note the post crisis rise in the value of the dollar and the enormous popularity of US treasury bonds.

So where are we now? OPEC got the American president it wanted but at an exorbitant price. To steady the American economy, oil prices will have to stay low and foreign government will have to buy more American debt than ever. The projected American deficit next year is going to be around a billion dollars to which a stimulus package of about another half a billion dollars will probably be added.

If all goes well, the American consumer (excluding its poorest component) will have a short memory and it will renew its reckless spending. If it turns thrifty, the recession will last longer. Either way, the new, less confident developing world consumers are no longer likely to follow suit and the corporate world is going to be much more risk averse. In other words, the era of fast paced global development is probably over and the poor will stay poorer longer.

What is to be done? We must use this crisis to make major strides towards energy independence. A major part of the stimulus package should be spent on investment in our energy resources. This is the time to take a holistic approach. We should do everything, so that never, but never, will energy warlords be in a position to hold us hostage again. As in 1973 and 1979, they have demonstrated yet again that they cannot be trusted. Enough is enough.



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Elliott Aron Green - 11/26/2008

Does anybody ask anymnore why the US Treasury back in 1951 approved applying the Foreign Tax Credit to purchases of oil from Saudi Arabia? ARAMCO was allowed to treat royalties [or part of them] paid to Saudi Arabia as a Saudi-imposed "oil income tax." This in turn allowed the Treasury to grant ARAMCO a Foreign Tax Credit on the royalty payments, deductible dollar for dollar from US corporate income taxes that ARAMCO otherwise would have had to pay.

This procedure helped enrich both ARAMCO and its owners, as well as the Saudi royals, thus promoting sales of Cadillacs, air conditioners, etc. to the previously impoverished denizens of the desert. Whether it was good policy is another question. It did help Prince Al-Walid [Alwaleed] get rich too.

But it seems to me that one major effect of this policy was to support oil prices, to keep them higher than they had to be. Can Franklin and Nonya enlighten us on this issue?


Greg Franklin - 11/26/2008

The foreclosure ball was rolling long before the gas prices went up - it has been moving since the housing market began to cool off in 2004/2005 or so. But once gas began to get so expensive that it commandeered the family budget, things did get worse.


Greg Franklin - 11/25/2008

The difficulty is that the issue isn't who supplies us with the oil (we really couldn't care less who it is), it is the price. A tariff would just make domestic oil more expensive (no oil company is going to sell for much less than their foreign competition) - unfortunately we are about to inaugurate an administration that hates oil companies, so higher prices won't cause us to drill, baby, drill. We'll just get poorer and poorer. We didn't even think about ramping up coal-to-oil conversion, profitable at $50-$60/barrel, when oil topped $147, and the new federal government has said it will oppose us increasing production to meet our needs, so how would a tariff make Obama do a 180 and become the world's biggest supporter of fossil fuels? The guy's so dumb he thinks that my new SUV can just be plugged in and not use any gas, if only he can make electricity production green enough. ACK!!!!


Arnold Shcherban - 11/25/2008

She will explain nothing to you or anybody else.
It's just her wishful thinking that urges her to insidiously link Obama to Islam, and eventually, to Muslim terrorists.
Using the ol' good tactics of thiefs (ideological ones - in her case) she
screams "Hold the thief", while praising the real thiefs and terrorist enablers: Bush family and the rest in GWB's administration who have extensive and warm (energetic) connections with OPEC's leaders.


Jason Nonya Nonya - 11/25/2008

All that certainly set the stage for the dangerous bubble, but people were generally making payments until their fuel prices doubled. Then they just gave up. At least that's what happened where I live.


Jason Nonya Nonya - 11/25/2008

There is no question the spike in gas prices started the foreclosure ball rolling and pierced the subprime bubble.


Jason Nonya Nonya - 11/25/2008

Obama has made no promise to end our addiction to oil. He is just going to engage in more pork barrel spending DISGUISED as green initiatives. If he was serious about reducing our dependence on foreign oil, he would be talking about an import tariff. The rest is just smoke and mirrors.


Jason Nonya Nonya - 11/25/2008

Obama has made no promise to end our addiction to oil. He is just going to engage in more pork barrel spending DISGUISED as green initiatives. If he was serious about reducing our dependence on foreign oil, he would be talking about an import tariff. The rest is just smoke and mirrors.


Jason Nonya Nonya - 11/25/2008

Greg, the fact that prices of imported oil and gas do not move according to demand/supply market forces is all the more reason to reduce their role in our economy via a tariff. And with prices cranked up, we would make domestic production a priority. Finally, giving the money to the U.S. government beats giving it to terrorist nations that want to kill us. Try again.


Drew Thomas - 11/24/2008

First, there will always be a need for oil to a degree far into the future. Second, the Arab world is volatile due to dogma. They view us as immoral,drug and alcohol users who promote sex and single motherhood in a desecrated society of tatoos,piercings and ignorance. To them, we are scum and they do not want our Western ways to influence their culture by our presence. They feel more understood with Obama and saw McCain as a continuation of the loathed Bush who just made up crap to go over there and start shooting.


Drew Thomas - 11/24/2008

Oil prices had NOTHING TO DO with the sub-prime collapse. Counterfeited real estate equities fabricated by appraisers, loan agents, realtors and mortgage banks whose interests are only in the front end of a loan at its closure, in the form of commissions, without any exposure to default risk made it happen. The bogus collateral was capitalized with REAL money that got spent on Escalades and plasma tv's. Then, the lenders wanted even bigger payments (rate adjustments) for their loans (MILLIONS OF THEM) against phony house values.
That's the tip of the iceberg. Packaged mortgage securities and credit default swaps are a worse nightmare.


Claudia Hallday - 11/24/2008

So are we to believe that there was NO relationship between families' transportation costs doubling and mortgage foreclosures? Remember, you are talking here about people who were barely making it to begin with--that is why they had subprime mortgages.
There are obviously a lot of factors. Our whole economic system is built on credit because that is the only thing that would enable people to have the standard of living that they believed they were entitled to, something they had bought into because their unbridled consumerism made others wealthy. The tragic part of this is that there are people who believed in living within their means and saving for a rainy day who have been virtually wiped out by this crisis. As their 401K's dissolve and their home equity diminishes (and their biggest asset can no longer be converted to cash since people can't buy houses right now), they find themselves no better off than the ones who though that being able to make payments on something was the same thing as being able to afford it.


D A Williams - 11/24/2008

"OPEC got the American president it wanted"???

Please explain why OPEC would want a president who has pledged to take us off foreign oil by developing "green" energy,and isn't a lying Republican oil guy?? would this not in fact be OPEC's worst nightmare??


Michael Hughes - 11/24/2008

"OPEC got the American president it wanted but at an exorbitant price."

There is no evidence that OPEC had a hand in the recent oil price surge, let alone choose a U.S. president.

In retrospect, the rapid oil price increase looks like a bubble peculiar to oil speculation. OPEC certainly had no interest in volatile prices. It learned that lesson in the two oil shocks in the 70s. That's the basic flaw in Klinghoffer's argument.


Frank Lucas - 11/24/2008

Your thesis is debatable. However, the bubble burst.

It's my belief that in a Bush-era painted by the myoptic enemy of terrorists, it took a historically well- know "enemy", to push the Bush administration, albeit in the name of oil again, to inflate the dollar to a realistic level and then deflate the value of crude--in this I'm talking about the Russian invasion of South Osteia.

In the sphere of economic warfare, US policy after the Russian invasion was a victory at all costs--including free markets, not only the Russian oil profit-based economy, which was never to the Libertarian, Neo-Con liking anyway but others as well.

Oil is central to this discussion however in itself being responsible for the crunch, not so, but the comprehensive econimic policy of the the Libertarian, Neo-Convervatives certainly was.




gompy usa - 11/24/2008

Anyone may have its own opinions on what, why, etc. However, oil at fault? Guess we all should go back to the beginning. Unions demanding more and more money and getting it. That means an increase in prices, because these increase of costs has to come from somewhere. People receive more money and spending it. They spent more then they actually can. Expensive cars, bigger and expensive houses, no interest or low interest. Suddenly credit card payment lacking behind, rent payment lacking behind, insurance premium payment lacking behind. Not enough money to pay all the bills. Credit card companies demand payment. Poeple pay their credit cards, but not their mortgage or rent. Same bank who gave a no loan mortgage, also gave the credit card. People trying, but is's to late. Banks demand payment, but don't get it. result, real estate lowers in value. Oops, these mortgages were packed and sold to Qualified investors, because of their high ratings provided to them by Moody's, Standard & poor's, etc. These investors demand money back, but their is none, because their value was decreased. Problem all over the markets. Who is to blame? The banks itself? yes, the greed of investors? Yes! The rating agencies? Yes, they provided high ratings against payment. If the regular person would do such, he/she would be arrested and put in jail. Who is put in jail? No one. Why not? Wall Street is know that they are permitted to steal and it's considered legal. Any bail out should be rejected. Restructure and fire all union people, because they started it all and all will pay the price for thier greed. UNion was and is just as greedy as the investors and banks.


Greg Franklin - 11/24/2008

Such hostility towards the effectual people of the world!

Hostility towards business is certainly not the solution to anything.


Greg Franklin - 11/24/2008

I might suggest that the collapse of the subprime martgage market came from the short-sightedness of the banks - the huge growth resulting from the Bush tax cuts resulted in an increase in interest rates, which were the proverbial straw that broke the camel's back. Subprime borrowers suddenly found their mortgage payments increased beyond their ability to afford, because all of their mortgages were Adjustable Rate Mortgages, subject to increase as interest rates went up. Banks wouldn't give subprime borrowers fixed rates because they felt rates should be as high as possible to cover the riskiness of the loans, but that only guaranteed default because rates had nowhere to go but up. Refusing to give stable, predictable fixed rate mortgages to the most fragile borrowers was the recipe for the present disaster.

But the overwhelming majority of mortgagaes are not subprime, so that while we may have faced financial difficulties from the subprime mortgages, it wouldn't have caused this collapse by itself. More than doubling a major part of most families' expenses, however, might well have precipitated it.


Greg Franklin - 11/24/2008

The glaring problem with an import tariff is that oil/gasoline prices, unlike almost everything else, are not directly governed by supply/demand, as evidenced by the recent spike in price which did not result from either a drastic reduction in supply nor a sudden leap in demand. The return of prices to rational levels resulted from weakness in the underlying economy, not a plunge in consumption. The reduction in consumption, if any, helped signal that the economy was weak enough not to sustain the rampant rise in price any longer.

If tariffs were the solution, rising prices would cause either a commensurate fall in domestic consumption, a rise in domestic production, or both. Yet even though the technology actually exists to convert coal to oil economically at around a price of $50-$60 a barrel, I never once heard that being discussed as a solution to the recent situation, even though coal-to-oil conversion would give the US 10 times the reserves of Saudi Arabia. New drilling in areas previously off-limits was the main solution, along with stupidity like 'Let's turn to wind power', at a time when there was no lack of supply of electricity, and electricity can't replace gasoline as a source of power for cars.

And the best argument against tariffs in general is that they take money out of the economy and waste it by giving it to the government - the worst allocators of resources in the universe. Maybe once it gets out of arenas that it has no Constitutional directive to be in...but not until then.


richard james mulcahy - 11/24/2008

Amen! As Opec greed drove the final nails in the economic coffin,our own government has agreed to bail out Citigroup. The people who agreed to this hand should be prosecuted and hung for treason.


Bob Thompson - 11/23/2008

I don't doubt your specific experience. My point is as follows. Without the subprime lending situation the gasoline price increase would have been merely a discomfort and only in rare circumstances would it cause an individual's finances to collapse. On the other hand, we were heading for the financial collapse related to subprime mortgages regardless of gasoline prices.


Jason Nonya Nonya - 11/23/2008

With a flexible import tariff, we could GRADUALLY wean ourselves off of foreign oil, rather than be knocked flat on our ass time after time by horrendous supply shocks manipulated at the whim of our enemies.


Jason Nonya Nonya - 11/23/2008

The author is correct. I represent several landlords, and it is clear that the spike in gasoline prices this summer were responsible for piercing the subprime loan bubble. People had no money to pay their notes because it was all going in their gas tank.


Bob Thompson - 11/23/2008

You may be correct in your estimate of OPEC's motives and their expectation that others would continue the recent demand level for oil, but I see no facts (numbers) that would actually suggest the oil price increase rather than subprime lending and the housing price bubble precipitated the collapse. The oil price increase is barely a blip. The U.S. economy won't stabilize until the average home price reaches a point of something resembling equilibrium with the average household income along with a housing supply/demand equilibrium.


Jason Nonya Nonya - 11/23/2008

I call bullshit on subsidies for alternative fuels. They are nothing more than wasteful pork barrel spending plus misguided government intervention in the market that will fail. The correct answer is an import tariff on imported crude (excluding Canada and Mexico) Drive up the price and reduce our dependence on imported oil. The market will find the alternative fuels just fine. Also create a board that can adjust the tariff to manage the economy in the same way the Fed adjusts interest rates. It could create a type of shock absorber by suspending the tariff in times of a price shock. I am a free market conservative, but this is a matter of national security.


George Hawkins - 11/23/2008

deficit=trillion
I worry that we are like the Texas oil men who had to buy new calculators to handle the big numbers.