An article in yesterday’s New York Post brought out an interesting point: while we, and much of the world, tend to blame the economic mess on American bankers who over-leveraged themselves, the data suggest something different.
A year ago, when we were dithering with the question of whether or not we were having a recession, much of Europe and Asia was already in trouble. While we retroactively place the beginning of the recession at December 2007, the wheels didn’t really come off the American economy until September 2008.
So what happened? In late 2007 and early 2008, there was a huge runup in the price of crude oil, topping out at $150 or so a barrel in July 2008. For us in the US, the price rise played out as an annoyance: ‘Pain at the Pump’ was a constant headline on the NBC evening news.
The rising price pushed the economies of Europe and Asia, and even Canada, directly into recession. But we hung on for a while: perhaps our propensity to run up debt shielded us from the direct effects of the price rise.
And then we got in trouble as the price fell. Perhaps we would have hung on if the price had stayed up; perhaps our unregulated hedgemen had bet on the price of petroleum and lost their shirts, and that was the straw that broke our camel’s back. Or maybe we just exhausted our capacity to paper over our problems with debt.
In any case, when all hell was breaking loose last September and October, nobody seemed to notice–or to assess–the effects of the high price of oil in the previous months. It was just that the price of oil had dropped because of slack demand.
Yes, our bankers made a royal mess of things, and created an environment in which even responsible businessmen believed they could make money out of thin air by investing in real estate. But the rising price of oil has more of the blame.
However, if we consider the price of oil, instead of our inept bankers, as a primary cause of our difficulties, our strategy for dealing with the problem should properly change. In that case, we simply took a hit from a market force that is no longer with us, and should try to walk it off, with some modest stimulus efforts. The ‘troubled assets’ would be secondary, best left for the market to deal with.
Of course, that’s not the approach we’re taking….