Systemic Collapse: The Basics

[free spirit]

Do you mind if I copy that post? I've been trying to explain this to my dad and a few others but since I don't properly get it myself I've been struggling.

no problem.

 

[SpineyNorman]

a lot of these mortgages were sold on false promises of what could happen when the initial period ended (and in a lot of cases borrowers weren't even made aware that payments would go up afte the two years teaser period) - whether the people selling them the mortgages really believed in what they told them or blatantly lied, it didn't matter for them as they didn't hold onto the risk of the mortgages, they were packaged up and sold on and then bundled into CDO's that were structured in such an alchemist way that the people buying them didn't realise the risks inherent in them.

I think the penny started to drop in 2007 that this alchemy couldn't last as the amount of pressure in the system built up to abnormal levels and things started to unfold from there, these initial triggers started everything rolling and made sure that from early 2008 onwards there was no possibility of these borrowers being able to remortgage whatsoever as house prices were already starting to fall in an iterative cause & effect loop - many of them had taken 100%+ mortgages pushing them into negative equity almost from the get go (as a lot of the mortgages had the monthly payments set so low that the outstanding mortgage balance actually rose each month rather than following)

nothing to do with oil i'm afraid

So, just to make sure I've understood you, the lenders began to realise that there were so many of these people, and that they wouldn't be able to pay their loans back, so they began to refuse to re-mortgage? So what changed was that there were more and more of these sub-prime mortgages and the lenders began to realise how toxic they could be, and so didn't want to take any more on, which of course is perfectly rational for the individual lender but if everyone does it the crisis comes cos they can't keep up payments anyway? If so that makes sense to me, but then again so does the oil thing.

Fuck knows lol

 

[free spirit]

Don't have much time to do a proper response to this at the moment but a large part of what made sub prime mortgages just affordable at one point and not affordable at another, is that the majority of these mortgages had introductory offers which means the borrower paid a much lower rate for the first couple of years, making their payments affordable at the time, and with the promise of a booming property market the possibility was there to remortgage of the back of the increasing price to other mortgages which had similar 'teaster' introductory offers.

The reality is that when a lot of these introductory/teaser offers came to an end, the refinancing wasn't possible and homeowners were hit with an effective doubling of their mortgage payments overnight - this started off a rolling pattern of defaults as soon as the teaser period ended. I remember in the autumn of 2007 looking at a graph of US mortgages showing the value of mortgages that were due to have their teaser rates reset over the next 5 years or so and thinking that this was going to be catastrophic - and it was

I thought this would have been covered by the 'dodgy lending practices' bit of my first post on this.

I'm in no way disputing what you're saying about this here, merely pointing out that the huge rise in the pump price for oil contributed significantly to bringing this situation to a head, and resulting in the scale of the collapse being far greater than it would have been without it.

Bear in mind it's not just the direct money spent on fuel we're talking about here, it would have impacted directly on the inflation rate of food and most other consumer goods.

To put some numbers on this, the average US household expenditure on Gasoline rose by $700 a year between 2005-2008, and food spending rose by $300 dollars in the same period, so that's an average of $1000 less per household available for other stuff like mortgage payments for those who're already struggling. These figures hide the reality though for those families who drove the furthest to get to work, and had the least options to reduce this, where the true figure could easily have been $1500 a year or higher.

Taken by itself, this level of increase may have been managable, but for many of those familes who'd already have had problems from the mortgage issues you mention, this level of additional expenditure on fuel as well as the mortgage increases would have at a minimum sent them over the edge earlier, and with some families will have pushed their family budgets beyond breaking point where they'd otherwise have survived.

i'd say the reverse and that it was the crash that reduced oil prices because of the obvious recessions/depressions that it was soon to provoke/cause

this is obviously true, and has been commented upon many times. I'm not sure why you think this disproves the idea of the previous oil price rises being a significant contributory factor to the bursting of the sub prime mortgage bubble (and the rest of the economic problems) though.

 

[SpineyNorman]

no problem.

Thanks.

 

[Falcon]

If so that makes sense to me, but then again so does the oil thing.

It's OK - the two are entirely compatible. If I can risk an analogy: AIDS makes you susceptible to a number of diseases, but it is the disease that finishes you off, not the AIDS. Love Detective is giving you the detailed pathology of the specific disease, while ignoring (in fact denying) the AIDS. Denial is necessary because treating the disease and treating AIDS require different approaches, and he believes the approach required for treating AIDS is incompatible with the ideology with which he'd like to tackle the disease. If your doctor diagnosed your pneumonia as pneumonia rather than AIDS, you'd get a little grumpy - as you should with love detective.

AIDS here is economy's systemic dependence on low oil price for economic function. The disease here is the weakest link in the economic system in 2008 - the exotic derivative backed mortgage market.

That is why understanding supply stagnation allows you to explain a whole range of phenomena that followed, while "it's the mortgage market, stoopid!" doesn't even properly explain this phenomenon. Love Detective is rather tying himself in knots trying to explain how a systematic increase in prices across every economic sector caused by oil supply stagnation did not have an impact on the affordability of mortgages, much as your incompetent doctor might have difficulty accounting for gastrointestinal problems having decided you had pneumonia.

Amusingly, his analysis of the symptoms of the crash is perfectly correct. Also, the approach for treating the underlying cause and the approach he'd prefer are not too dissimilar. But he's got the blinkers on, as is so often the case when the desire to shoe horn an event into a particular explanation requires you to ignore entire chunks of reality.

 

[love detective]

I thought this would have been covered by the 'dodgy lending practices' bit of my first post on this.

yes, the difference is you're claiming oil prices were the primary reason for the crash and i'm not

I'm in no way disputing what you're saying about this here, merely pointing out that the huge rise in the pump price for oil contributed significantly to bringing this situation to a head, and resulting in the scale of the collapse being far greater than it would have been without it.

Bear in mind it's not just the direct money spent on fuel we're talking about here, it would have impacted directly on the inflation rate of food and most other consumer goods.

If you look at any of the statistics on real wages in USA for both median and lower deciles up to about 2007/2008 (i.e. showing the purchasing power of wages after taking into account the inflation to which you refer to) you will see that they are either stagnant or slightly rising - this shows that despite the price increases in all manner of things caused by rising oil prices, this was still not significant enough to bring about a reduction in real income/spending power. Therefore labour's share of value created was enough to offset these rising living costs, meaning this can't be used as a systematic reason for explaining why householders couldn't afford their mortgage payments from 2007/8 onwards

To put some numbers on this, the average US household expenditure on Gasoline rose by $700 a year between 2005-2008, and food spending rose by $300 dollars in the same period, so that's an average of $1000 less per household available for other stuff like mortgage payments for those who're already struggling. These figures hide the reality though for those families who drove the furthest to get to work, and had the least options to reduce this, where the true figure could easily have been $1500 a year or higher.

These numbers in isolation mean nothing without looking at how much nominal wages increased in the same period. I don't like to work with averages as they disguise more than they reveal, but as you mentioned average food/energy costs - average US wages in the period you refer to were something like 50k a year - this means that an average payrise of 2% would have been enough to offset the increased cost of gas & food that you refer to above. I'm certain that average payrises were more than that in the period you refer to

Taken by itself, this level of increase may have been managable, but for many of those familes who'd already have had problems from the mortgage issues you mention, this level of additional expenditure on fuel as well as the mortgage increases would have at a minimum sent them over the edge earlier, and with some families will have pushed their family budgets beyond breaking point where they'd otherwise have survived.

i'm not saying they didn't have an impact on families living standards, i'm saying they were not the primary driver for the people defaulting. how many times do i need to say that the near doubling of your mortgage payment overnight (most people's single biggest expense) far outweighs the creeping increase in food/energy prices over a period in which nominal wage increases offset if not all then a substanital part of those increases. There were no equivalent increases in wages to offset the impact of the expiry of the 'teaser' rate of ARM mortgages - which left people with no other option but to default and post their keys back, this started first as a ripple and then a tsunami - the impact of increases in food/energy prices had nothing like the impact this had

this is obviously true, and has been commented upon many times. I'm not sure why you think this disproves the idea of the previous oil price rises being a significant contributory factor to the bursting of the sub prime mortgage bubble (and the rest of the economic problems) though.

i agree it was a banal and meaningless statement - i didn't intend to give the impression that saying that was part of my case for situating the reason for the crash in something other than oil prices

 

[Falcon]

These numbers in isolation mean nothing without looking at how much nominal wages increased in the same period. I don't like to work with averages as they disguise more than they reveal, but as you mentioned average food/energy costs - average US wages in the period you refer to were something like 50k a year - this means that an average payrise of 2% would have been enough to offset the increased cost of gas & food that you refer to above. I'm certain that average payrises were more than that in the period you refer to

A fundamental misunderstanding of the nature of the derivative instrument. These were synthetic debt instruments, the value of which no-one (initially) understood or could calculate and which, therefore, depended on everyone believing that they had value.

The average wage, and the impact of oil price rise on average wage, is irrelevant. What matters is the impact the oil price rise had on the bottom tranche of wage earners, who had been unwisely loaned money and for whom the oil price induced cost of living increases on top of their mortgage payments were fatal. It was the exposure and systematic default of that tranche which forced the revaluation of the debt instrument - specifically, proved that they were worthless.

It is the mine canary keeling over that proves the mine is saturated with gas, not the miner.

Love Detective has no explanation for what this mysterious "pressure" was, why it happened to coincide with the obvious pressure of the oil price rise, and why it this mysterious pressure and not the obvious pressure which triggered the default.

 

[love detective]

IBut he's got the blinkers on, as is so often the case when the desire to shoe horn an event into a particular explanation requires you to ignore entire chunks of reality.

i'm sure the irony of this statement about me from you will not be lost on a number of posters on this board

And as to ignoring chunks of reality, can you explain away the reality of the situation that shows us that real wage data shows that increasing food/energy prices did not have the impact you claim it did?

your description of me is an apt description, the only problem is that it describes you more than it does me

 

[Falcon]

And as to ignoring chunks of reality, can you explain away the reality of the situation that shows us that real wage data shows that increasing food/energy prices did not have the impact you claim it did?

Our posts crossed. Yes. Not everyone earned the average wage, the oil price increase affected the lower wage earners more than the higher earners, and the system was sensitive to default in the lowest wage earner tranche.

 

[love detective]

A fundamental misunderstanding of the nature of the derivative instrument. These were synthetic debt instruments, the value of which no-one (initially) understood or could calculate and which, therefore, depended on everyone believing that they had value.

The average wage, and the impact of oil price rise on average wage, is irrelevant. What matters is the impact the oil price rise had on the bottom tranche of wage earners, who had been unwisely loaned money and for whom the oil price induced cost of living increases were fatal. It was the exposure and systematic default of that tranche which forced the revaluation of the debt instrument - specifically, proved that they were worthless.

It is the mine canary keeling over that proves the mine is saturated with gas, not the miner.

this post has confirmed to me that you don't have a clue what you're talking about - my 2-3 posts above specifically talked about the median and lower decile pattern of real wages - the only reason i talked about averages in the post above is because free spirit used averages to make a point to me, so i responded using the same basis as he had done (while specifically pointing out that i don't like to use averages as they disguise more than they reveal - you disingenuously ignore this however)

are you seriously unable to comprehend how the doubling of your single biggest monthly expense (through nothing to do with oil prices) is going to have a far more violent and abrupt impact than the slower gradual increase in food/energy prices in a period which nominal wage increases offset if not all then a substantial part of those increases?

 

[love detective]

Our posts crossed. Yes. Not everyone earned the average wage, the oil price increase affected the lower wage earners more than the higher earners, and the system was sensitive to default in the lowest wage earner tranche.

i've already addressed this in my post above

i find it interesting though (and somewhat revealing about your integrity) that in the post where i said this:

If you look at any of the statistics on real wages in USA for both median and lower deciles up to about 2007/2008 (i.e. showing the purchasing power of wages after taking into account the inflation to which you refer to) you will see that they are either stagnant or slightly rising - this shows that despite the price increases in all manner of things caused by rising oil prices, this was still not significant enough to bring about a reduction in real income/spending power. Therefore labour's share of value created was enough to offset these rising living costs, meaning this can't be used as a systematic reason for explaining why householders couldn't afford their mortgage payments from 2007/8 onwards

you ignored my references to median and lower decile wages and instead tried to salvage your point by trying to make out that I was talking about average wages

starting to seem somewhat disingenuous and dishonest approach from you to desperately cling on to a point that can't be substantiated

 

[elbows]

Well, let me explain what I mean, then. The lifting cost of conventional Saudi sweet crude is about $18/bbl. The lifting cost of shale oil and tar sands is north of $90. Note that neither of these lifting costs factor in carbon mitigation costs. If your lifting cost is $90 (set by the operation), and the maximum price is $90 (set by the economy), then there is no margin and therefore no profit with which to fund further investment in depletion replacement (let alone pay the dividend upon which pensions disproportionately depend). In other words, for that fraction of theoretical production capacity which you perceive to be capable of sustaining some sort of plateau (the marginal, high cost stuff), there is no distinction between cost and price. I'm not mocking you.

Surely the only reason you can say there is no distinction between cost and price is because the example you have used happens to have the same lifting cost as the maximum price. When I talk of the age of easy and cheap oil being over, Im not suggesting that all the new production coming online comes at a price of $90 or above. I'll have to do quite a large amount of research to get into more detail on this, but the kind of thing you are talking about there is at least a fair starting point for discussing this interesting relationship further.

For example it is certainly true that there a present concern is that there will be another drop in demand caused by another recession (or ongoing depression if you like), which will cause another oil price drop for some period of time. And this drop in price could lock out some of the future possible production that would have been considered economically viable at todays higher prices. For technical & economic reasons some projects will simply be delayed by this, but others could end up permanently out of the picture.

Excuse me? We need to cut production by 80% today to avoid risks which include, amongst other outcomes, species extinction. In what way is that a "long" emergency?

We don't have to cut production by 80% today in order to meet the target of leaving 80% of the 'proven' reserves in the ground. The massive cuts have to come, but the timing can be quite different than '80% tomorrow'.

For this reason, and the fact that people have been talking about similar issues for decades, and that the species or planet does not die overnight, it is a long emergency. Long time where issues & hard decisions were avoided, long time to cry out that we are too late, long time to suffer the consequences. Something closer to a bell curve with intermittent spikes and temporary rest bites than Wile E Coyote.

I'll confess, I considered this. In the end, I decided that for this to have merit you would have to believe simultaneously that 95% of the climate change scientific community was either incompetent or morally compromised, *and* that the coalition of oil, coal, automotive and aviation industries funding the millions of dollars worth of counter argument (in which I used to enthusiastically participate) were, in fact, doing so with our long term interests in mind. I decided this was much less likely than the climate instability proposition.

But I said I was not skeptical about climate change. I am talking about factors which encourage certain powers to acknowledge the scope of the climate problem, and to go on about it, set targets, etc. Its easy to imagine what interests would be against the acknowledgement and tacking of climate change, and how easily governments are capable of ignoring very real problems that the masses care about if a more powerful interest dictates that the problem should not be solved. Given that I believe the markets cannot handle the truth of peak oil, and that fully acknowledging the scale of the problem and the required solutions would alone be enough to cause the system to go wonky, I have therefore from time to time considered the possibility that climate change can be used to talk about energy decline without acknowledging energy decline. Another advantage is that climate change gives us a perception that its our choice, that humanity can heroically decide to save its own skin by reducing consumption, rather than simply having this reality forced upon us by physical reality. And given the apparent appeal that positive action/progress/pretending to be in the driving seat apparently has over non-doomy people, I can see why it would be the sort of marketing & narrative they'd encourage at the point of crisis we found ourselves in in by the mid 2000's. A couple of years later they turned down the notch on this, and we almost started to get a global political elite discussion about oil production woes/price (e.g. Gordon Browns Saudi conference), but then very quickly after the economic & financial woe burst onto the stage and hogged the limelight.

 

[elbows]

I doubt that it is going to be easy to completely prove the oil-financial crisis link to the satisfaction of those who are not coming to the discussion with peak oil as the centrepiece of their expectations for the future.

I assume that it is very easy for others like myself who have had a peak oil focus to have seen the oil price rise years ago and thought 'this is confirming my expectations'. And then to see the mainstream concern about the oil price damaging economies and again see this as confirmation of our existing beliefs. And then to see the financial crisis unfold but for the mainstream to focus on a multitude of explanations that were not directly oil-related, and to feel almost cheated that a potential moment of mainstream realisation had been at least partially obscured once more. And for this phenomenon to continue unabated as we are squeezed through the austerity tubes of woe.

When we think about the required political response to austerity, it seems pretty crucial that something changes on this front, yet I don't have that much confidence that it will be doing so in a hurry. Personally I don't find it completely necessary to prove the oil price-economic woe link, I can still mash the subjects together and paint a picture that is just as ugly. In fact if I was forced to go down the road of denying a link between oil price and financial woe, I could claim that this is an even more depressing scenario - rather than a system that was knocked of its feet by oil woes, its a system that has other massive weaknesses that brought it to its knees before oil had even landed its first blow.

 

[love detective]

Love Detective has no explanation for what this mysterious "pressure" was, why it happened to coincide with the obvious pressure of the oil price rise, and why it this mysterious pressure and not the obvious pressure which triggered the default.

I wish you'd stop editing your posts sometime after i've responded to them as it makes it look like i'm avoiding your points

I've explained what the pressure was countless times in a series of posts, the only thing that is mysterious is your inability to grasp it

here it is in picture form


The big light green bars around 2007 to 2009 shows the value of sub prime mortgages that were due for a rate reset - which typically would increase the borrowers monthly payments from anything from 50% to 200% overnight.

The combined value of those light green bars was something like half a trillion dollars - meaning half a trillion dollars of mortgages whose payments were going to dramatically rise in such a short period of time, with little or no means of refinancing or finding the extra income to finance them

this graph was published sometime in 2007 and even looking at it then it was blindingly obvious as to the unsustainable pressures that had built up in the system and were due to explode over the coming year as the new rates kicked in on such a huge amount of mortgages (the fact that the forecasted subprime mortgages resets tailed off from 2010/2011 onwards shows that the industry itself had already begun to realise by 2007 that the subprime market was unsustainable leading to a drastic reduction in loans)

Your continued stubborn (and somewhat dishonest) refusal to acknowledge the obvious and your retreat to merely assert a relation that the facts simply do not support as to the reason of the crash shows that you are ill-equipped and ill-prepared for this kind of analysis. I don't doubt your knowledge about energy related topics in and off themselves but you need to be aware you are over reaching here and out of your depth as you move into an area that you do not understand, and therefore one where your dogma overrides reason & empirical evidence

 

[love detective]

In fact if I was forced to go down the road of denying a link between oil price and financial woe, I could claim that this is an even more depressing scenario - rather than a system that was knocked of its feet by oil woes, its a system that has other massive weaknesses that brought it to its knees before oil had even landed its first blow.

and you'd be right - the tendency for crisis within capitalism is an inherent one, its reasons are primarily endogenous not exogenous, which is why things will be even worse when we do finally get a combination of crisis which comes from within (like the current one) with one which is primarily caused by resource depletion/environmental causes (obviously capitalism itself makes these things even worse, but the point being that even in a perfect world of unlimited energy supplies and no environmental problems, we would still see the kind of violent & debilitating ruptures that capitalism regularly produces)

 

[elbows]

this graph was published sometime in 2007 and even looking at it then it was blindingly obvious as to the unsustainable pressures that had built up in the system and were due to explode over the coming year as the new rates kicked in on such a huge amount of mortgages (the fact that the forecasted subprime mortgages resets tailed off from 2010/2011 onwards shows that the industry itself had already begun to realise by 2007 that the subprime market was unsustainable leading to a drastic reduction in loans)

One way to attempt to defend against that criticism is to try to tie the energy picture going back some decades to the reasons we ended up with bubbles such as subprime in the first place.

There are few limits on how far such a concept can be pushed by those with a desire to place one factor in the hotseat to the detriment of all others. And I don't have any reason to believe that a consensus will easily be found as to whether the dog is wagging the tail or the tail is wagging the dog.

Certainly it is possible to look at a large number of changes in the developed countries since some point in the 1970's and to declare that oil and other energy factors had their fingerprints over much of this stuff. There is no doubt they were a factor, its just a question of quite how far to stretch the point.

But at a minimum it would be remiss not to include some other factors on the list of credits. For a start I can't really ignore the rather interesting imbalances in global trade that have grown. And I certainly expect that the way the energy reality unfolds will be influenced by the rise of the likes of China. We can try to isolate factors for the purposes of discussion but we know there is going to be a giant mess of factors mixing together in all sorts of volatile ways as this stuff actually plays out in the world.

 

[free spirit]

yes, the difference is you're claiming oil prices were the primary reason for the crash and i'm not

I referred to it as "the thing that finally pricked the bubble".

Both the bubble and the thing that finally pricks it are necessary for the bubble to be pricked, but both would probably have brought the economy down anyway, it just happened either a bit earlier or more severely as a result of them both coinciding.

If you look at any of the statistics on real wages in USA for both median and lower deciles up to about 2008 (i.e. showing the purchasing power of wages after taking into account the inflation to which you refer to) you will see that they are either stagnant or slightly rising - this shows that despite the price increases in all manner of things caused by rising oil prices, this was still not significant enough to bring about a reduction in real income/spending power. Therefore labour's share of output was enough to offset the rising living costs.

These numbers in isolation mean nothing without looking at how much nominal wages increased in the same period. I don't like to work with averages as they disguise more than they reveal, but as you mentioned average food/energy costs - average US wages in the period you refer to were something like 50k a year - this means that an average payrise of 2% would have been enough to offset the increased cost of gas & food that you refer to above. I'm certain that average payrises were more than that in the period you refer to

fair point, and in the good times pay rises can obviously mask the problems associated with rapidly rising oil prices to a large extent on average.

For those who don't experience those average pay rises though it'd be a very different story, especially so for those who didn't get these pay rises, and were heavily reliant on their gas guzzling car, and were impacted by the mortgage issues you describe. So I'll agree with you about the problems with using averages.

I don't know where the data is now, but I remember back when it was happening seeing analysis of the worst affected areas, which matched relatively well with those areas of housing that were likely to be the most reliant on the car to get people to and from work, shops etc

Once the problems hit though, and the average wages stop rising, it also shows itself up in the average figures.

2007 | 2008
$10,531 | $10,263 - lower 20% household income before tax
$1,046 | $1,243 - lower 20% household expenditure on fuel (vehicles)
so, an average $270 a year reduction in income combined with a $200 a year rise in fuel costs

2007 | 2008
$27,674 | $27,442 - next 20% household income before tax
$1,768 | $2,019 - next 20% household expenditure on fuel (vehicles)
so an average $230 a year reduction in income combined with $250 a year rise in fuel costs
http://www.bls.gov/cex/csxann07.pdf
http://www.bls.gov/cex/csxann08.pdf



but yes, I fully agree that it was far from the only factor, and not even really the major factor in this situation. You'll note that I'm not really on the doom and gloom wing of the peak oil brigade hear, and I appreciate that it is just one of many factors involved in determining our collective fate.

 

[love detective]

One way to attempt to defend against that criticism is to try to tie the energy picture going back some decades to the reasons we ended up with bubbles such as subprime in the first place.

bubbles and the crisis that bursts them are an inherent part of capitalism - they have been present since the birth of capitalism and have an increasing tendency to be more violent, dangerous and widespread as time moves on. I've spent significant amounts of time researching the reasons for both this crisis and previpous ones, and everything suggests that this is a typical crisis whose roots lie within capitalism, a result of capitalism's inherent tendency to overreach itself which requires violent corrections once it's gone to far. It may have manifested itself in a different form (they always do) but the underlying essence/reasons for it are similar. You don't need to look outside of capitalism to find the reasons for the bubbles & crisis that it engenders. Saying this does not mean I deny the imminent crisis & dangers that resource depletion & environmental factors will bring, just that all the analysis and evidence points towards these things not playing a significant role in this particular crisis (and again just to make it clear, i'm not saying that there is no relation between capitalism's activities and the resource depletion/environmental problems, just that even if we didn't have any of these impending resource issues we'd still have crises for as long as we have capitalism)

Certainly it is possible to look at a large number of changes in the developed countries since some point in the 1970's and to declare that oil and other energy factors had their fingerprints over much of this stuff. There is no doubt they were a factor, its just a question of quite how far to stretch the point.

no one is denying that they played a role, just a very insignificant & subordinate one in the lead up to this particular crisis, and one which was not sufficient to create the impact that actually happened. Think about a typical subprime borrower - if you've just taken out a 100% mortgage on a house and a year or so later your mortgage payments were about to increase by anything in the region of 50% to 200% - do you think this would be a bigger impact in your monthly finances than the $83 a month increase in food/energy prices that free spirit quoted a few posts above (i.e. average $1000 a year increase - and in actual fact this amount is likely to be much lower for a typical sub prime borrower)? for the food/energy increase to have a bigger impact then this would imply your current monthly mortgage payment would have to be as small as around $80 a month for a 100% increase to have a lower impact than the stated increase in food/energy price increases. This just doesn't add up. The increase in monthly mortgage costs once rate resets kicked in for sub prime loans were likely to be a factor of something between 10-30 times that of the increased price of food/energy. So to say something which caused a price increase of 1/10th to 1/30th of something else played a bigger role than that something else is just being plain absurd frankly

 

[love detective]

but yes, I fully agree that it was far from the only factor, and not even really the major factor in this situation. You'll note that I'm not really on the doom and gloom wing of the peak oil brigade hear, and I appreciate that it is just one of many factors involved in determining our collective fate.

yep agreed - i'm probably more pessimistic than you on the impending energy/resource crisis, but to portray it as the primary or even a significant cause of this particular financial/economic crisis just doesn't fit with either a logical or empirical analysis of the situation in the run up to the crash

 

[elbows]

no one is denying that they played a role, just a very insignificant & subordinate one in the lead up to this particular crisis, and one which was not sufficient to create the impact that actually happened. Think about a typical subprime borrower - if you've just taken out a 100% mortgage on a house and a year or so later your mortgage payments were about to increase by anything in the region of 50% to 200% - do you think this would be a bigger impact in your monthly finances than the $83 a month increase in food/energy prices that free spirit quoted a few posts above (i.e. average $1000 a year increase - and in actual fact this amount is likely to be much lower for a typical sub prime borrower)? for the food/energy increase to have a bigger impact then this would imply your current monthly mortgage payment would have to be as small as around $80 a month for a 100% increase to have a lower impact than the stated increase in food/energy price increases. This just doesn't add up. The increase in monthly mortgage costs once rate resets kicked in for sub prime loans were likely to be a factor of something between 10-30 times that of the increased price of food/energy. So to say something which caused a price increase of 1/10th to 1/30th of something else played a bigger role than that something else is just being plain absurd frankly

I don't want to get carried away since Im not actually trying to suggest that everything is always about energy, but when it comes to subprime there are two questions I would ask which have the potential to lead back to oil.

Why were there so many subprime borrowers in the first place?

Why were their payments about to increase by such hefty percentages?

 

[free spirit]

tbh I see it mainly as being another advance warning to us of what's inevitably to come if we don't focus our attention on ensuring both our and the global economy are less dependent upon oil, and more resiliant to major oil price rises.

First step IMO would be to drastically curb speculation on commodity prices, which were responsible for far more of the 2008 peak price of oil than any actual shortage in supply vs demand, and have similarly been largely responsible for massive spikes in various other comodity prices including the grain price spikes that were mostly wrongly blamed on biofuel production.

In terms of pessimism... I fully understand what the worst case scenario could be here, what I object to is this being portrayed as in any way inevitable. It can be largely avoided if we deal with it seriously. Am I optimistic that this will happen... well, nothing in the last 20 years really gives me much cause for optimism on this other than the fact that much of the knowledge is already in place, and we have the ability to implement most of the solutions very rapidly once the collective will is in place to do it - eg in my industry, the UK moving from 50MWp of solar PV to over 1000MWp in little over a year.

We just need our politicians and their puppet masters to stop being so fucking stupid about it and treating it like some hippy extravagance.

 

[elbows]

First step IMO would be to drastically curb speculation on commodity prices, which were responsible for far more of the 2008 peak price of oil than any actual shortage in supply vs demand, and have similarly been largely responsible for massive spikes in various other comodity prices including the grain price spikes that were mostly wrongly blamed on biofuel production.

We just need our politicians and their puppet masters to stop being so fucking stupid about it and treating it like some hippy extravagance.

I wouldn't put it quite like that. Its not merely a question of stupidity & short-termism.

Its because what you are asking for there, which is only a fraction of the solution, requires the killing of a number of sacred cows. Markets, limited power of governments, consumer choice as the pretend driver of our destiny, these are not ideas that will die easily.

It won't be possible to keep these sacred cows alive forever, but they sure as hell won't let them slip away until they absolutely have to.

In the wake of the financial crisis there was some mainstream talk that 'trickle-down had failed', which shows the limits of what ideas they were prepared to slaughter at that point, and since then they've even tried to step back from sacrificing that one.

 

[free spirit]

I wouldn't put it quite like that. Its not merely a question of stupidity & short-termism.

Its because what you are asking for there, which is only a fraction of the solution, requires the killing of a number of sacred cows. Markets, limited power of governments, consumer choice as the pretend driver of our destiny, these are not ideas that will die easily.

I couldn't be arsed to list all the stupid things that combine in the neoliberalist mindset, so just summed it up as being stupid.

 

[elbows]

I couldn't be arsed to list all the stupid things that combine in the neoliberalist mindset, so just summed it up as being stupid.

A new chapter of potential stupidity invites you to scream:

http://www.guardian.co.uk/environment/2012/apr/15/chris-huhne-ministers-green-deal

A senior Tory source was quoted in the Sunday Telegraph saying: "The green deal was Chris Huhne's baby. He has gone now and it is the right time to kill it off. Forcing people to pay thousands of pounds for unwanted extra home insulation is the last thing hard-pressed families need at the moment. It's madness."
The Guardian has separately established that some ministers are opposed not just to any suggestion of a requirement to make a home more energy-efficient, but to the whole green deal itself.
One minister said: "It cannot be right that every time your boiler blows up, you have to face the cost of replacing it, but also buying loft insulation. It is piling too much on.

 

[romeo2001]

It's not because we lack imagination. Just because you have a shit life (not surprising given your attitude, I'm imagining a serious mate deficiency from where I'm sitting) that doesn't mean everyone else does.

And given the incredible struggles some go through every day just to stay alive, I'd say you've got a cheek, typing from your privileged position behind a computer screen, claiming they'd submit to death if only they weren't so lacking in imagination.

and thats one of the problems with the socialist cause as far as i can see - there are lots on here that seem to view working class life (maybe cos its from outside) as one long drudgery that people need freeing from - as you rightly state the reality is very very different - people dont want change cos in the main lifes pretty good in comparison

 

[SpineyNorman]

and thats one of the problems with the socialist cause as far as i can see - there are lots on here that seem to view working class life (maybe cos its from outside) as one long drudgery that people need freeing from - as you rightly state the reality is very very different - people dont want change cos in the main lifes pretty good in comparison

I wouldn't go that far, but it's certainly enough to stop people wishing they were never born. I think most people realise that their lives could potentially be better - that's not in any way incompatible with enjoying your life as it is now.

 

[romeo2001]

I wouldn't go that far, but it's certainly enough to stop people wishing they were never born. I think most people realise that their lives could potentially be better - that's not in any way incompatible with enjoying your life as it is now.

"lives being potentially better" is not a great motivator to a wholesale leap into the unknown tho - thats sort of the point- what socialism would require would be almost an evolution of life as we know it - if lifes pretty good and we are enjoying are lives then theres no incentive to change

 

[free spirit]

A new chapter of potential stupidity invites you to scream:

http://www.guardian.co.uk/environment/2012/apr/15/chris-huhne-ministers-green-deal

tbf, the green deal is an complete pigs ear of a scheme.

The stuff about using building regs to force people to upgrade their insulation etc when fitting a new boiler though isn't even green deal related, and is no different to the new FITs scheme regulations. It kinda makes sense as well, as it means people won't be oversizing their boilers, but does pose lots of other questions about what happens if someone refuses - will they then not legally be allowed to install a boiler?

 

[littlebabyjesus]

I don't want to get carried away since Im not actually trying to suggest that everything is always about energy, but when it comes to subprime there are two questions I would ask which have the potential to lead back to oil.

Why were there so many subprime borrowers in the first place?

Why were their payments about to increase by such hefty percentages?

The answer to the second question lies in the first. There were so many subprime borrowers in the first place as a consequence of periods of stability under capitalism leading to riskier and riskier lending. The longer a period of growth continues, the more people believe it will continue in the future. And then you don't. For whatever reason - and the key point is that the spark can be relatively trivial - confidence disappears and the faith in future asset value rises that underpinned the boom disappears. Suddenly subprime mortgages become liabilities that you know will not recoup their value. Interest rates reflect perceived risk, and suddenly the perceived risk was much higher.

A short sharp spike in oil prices could be enough to shatter confidence in the bubble, but to blame the subsequent crisis on that spike is like blaming the first world war on some Serb nationalist who shot some duke.

 

[love detective]

I don't want to get carried away since Im not actually trying to suggest that everything is always about energy, but when it comes to subprime there are two questions I would ask which have the potential to lead back to oil.

Why were there so many subprime borrowers in the first place?

Why were their payments about to increase by such hefty percentages?

Both of these questions had been answered in my previous posts on this topic - for example here & here. You're welcome to dispute what i've said and argue with the facts as i've presented them and i'm happy to go into more detail on them, but it would add more to the discussion if you did this rather than just ignore what's already been said on these points and put forward the possibility that the reasons for these two things 'have the potential to lead back to oil' - state your case man. My one is that it's near impossible to weave a story into these events that places oil supply as the underlying driver for any of these things - that's because the underlying drivers for them are very clear, and they don't involve oil.

I think the second question has already adequately been addressed in my previous posts and needs no further explanation here (although i'd be happy to do so and add more data to back up my points if you wish - but just to reiterate the payments increased by so much because most sub prime mortgages had an introductory rate for the first 2 or 3 years of the mortgages, meaning the borrower paid a much lower rate for the first 2 to 3 years and then were faced with a steep hike in rates once that introductory period expired - typically the interest rate would increase from something like 7% to 12% overnight, an increase of 71%).

The first question could probably do with some further expansion on what's already been said though. In essence the reason lies in capital's restless & relentless nature to continually exploit existing/established markets and to aggressively open up new ones when the ability to appropriate value in existing ones starts to tail off. While in general this drive was given fresh impetus with the advent of neo-liberalism in the late 1970's, one manifestation of it was - In the housing boom in the early/mid 2000's and on the back of rising house prices, from around 2003 onwards there was a concerted effort to exploit the housing boom by deepening the market for sub prime lending. This was achieved by a mixture of things. Firstly, the financial 'innovation' in early 2000's that created CDO's and the ability to package up these loans and sell them on to other investors, this had the effect of detaching the risk of the mortgage from the company giving the mortgage to the borrower. This meant there was no incentive or care on the part of the initial mortgage provider if the borrower could actually afford the payments once the teaser period expired because by that time the initial provider would have already earned a fee in selling on the mortgage, firstly to investment banks who would then package them up into CDO's and sell them on to other investors with the myth that high risk loans had been turned into low risk loans. This detachment of who bore the risk from who gives the initial loan was a crucial factor in the spiralling out of control of sub prime lending. Those providing the mortgage had no reason to care about whether the borrower could afford the payments after the introductory period expired and those who ultimately ended up bearing the risk of the mortgage (i.e. the investors in the packaged CDO's) had absolutely no idea what they were buying because everything had been mystified and blurred due to the 'financial innovation'. This against a backdrop and mantra of a world that had abolished boom & boost with the promise of ever increasing house prices as a natural law - meant that even those who could see the risk being built up by this, never really stopped to query it as there was this general hypnotic belief that alchemy really had been achieved (edit: only a few of the more shrewd hedge fund bosses saw what was coming - John Paulson for example saw this build up from 2005 onwards and started to bet heavily against the housing market & sub prime lending in particular, in 2007 earning him personally about 4 billion dollars in that year)

Another reason why there was so many sub prime borrowers is answered by the answer to your second question - i.e. the existence of 'teaser' introductory rates made the payments in those first few years affordable (i.e. a 7% mortgage interest rate rather than the 12% which it would normally be to someone off a poor credit rating). This drew a load of people with poor credit ratings into the mortgage market for the first time as the payments at the introductory rate were just about affordable. And as to fears about what would happen when that introductory 2-3 year period came to an end, there was a mixture of not caring from either side of the transaction. In many cases the borrowers didn't care or didn't even know/understand that the payments would increase so much (and the initial lenders didn't care as they had already offloaded the risk of non payment elsewhere). Where the borrowers knew their payments would balloon they were generally told that they could re-mortgage to get another teaser rate (which was not the case) or they simply didn't care as the mortgage offered allowed them to buy a home (for the first time in their lives and live the american dream) and have it for at least two to three years before having to think about what happened then. And and that time the idea that rising house prices would simply go on for ever meant if they couldn't afford the payments they would just sell the house and make a profit on the increased price over those few years.

So a mixture of this 'financial innovation', introductory interest rates and misinformation to vulnerable borrowers about what they were actually signing up to - meant that for the three years between 2004 and 2006, something close to a trillion dollars of sub prime lending was done - most of which had these introductory 2 to 3 year teaser rates on them. From that point onwards the system was then packed with a pipeline of mortgages that in 2 to 3 years would see massive increases in monthly payments, making them unaffordable to a significant proportion of borrowers. 2007 & 2008 was the crunch time for the expiry of the teaser rates for a huge chunk of those mortgages, which is why the crash happened at the time that it did. Borrowers were made homeless as they handed back the keys in the face of unsustainable mortgage payments which in turn brought about the housing crash and the tumbling down of everything that had been built on the back of it.