Rethinking how the housing crisis happened - MIT Sloan School of Management
mitsloan.mit.edu/newsroom/articles/rethinking...Posted Jan 2, 2017, 9:52 PM UTC
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I agree wholeheartedly, that the housing crisis is a symptom, or hiccup in the greater trend. I will venture and say that even blaming risky lending practices is a symptom, and not the cause.
The cause is due to a non-productive economy, which manifests itself in a number of ways, and loose lending restrictions being one of them.
Returns on investments have been decreasing for a long time, and for the past 8 years, have been exceptionally low forcing investors into riskier assets. (See low bond yields and negative interest rates and even low returns on the stock market since QE ended in 2014). This has now (far too little and far too late in my opinion) seen in CalPERS lowering assumed returns and hedge funds closing. People used to be able to retire off of bonds and CDs, and now you can't even meet inflation with those methods.
Productivity never really regained after the great recession and probably never will. The exception to this is in crop yields. There have been some real astonishing increases in crop yields in the past decade which is why food prices are very low right now. This, of course, is at the expense of soil any semblance of sustainability, but that's for another day.
The US is still riding the wave of economic growth it had from the 1950's to 2000, but this non-productivity and demographics are catching up where the great recession happened and we never really recovered. Europe's metaphorical wave wasn't as big (and has a bigger demographic problem that the US), and they are suffering proportionally. (No thanks to you, Germany!)
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Productivity never really regained after the great recession and probably never will.
Which also fits with lowered net energy returns from oil since 2005.
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This is the second study to confirm what many in the peak oil community have long speculated on - that the subprime crises may have been the first tremor of peak oil rather than the popular assumption, that it was caused by risky lending practices.
It turns out that the largest proportion of the mortgage defaults were in fact prime borrowers. This could then suggest that the following occurred:
in 2005, world production of affordable conventional oil topped out, as predicted in the 1998 Scientific American article "The End of Cheap Oil" (Campbell and Laherrère).
as the economy was still ticking over nicely, demand for oil continued to increase. Increasing demand combined with static supply resulted in the price of of oil rocketing from $40/barrel in 2005 to $140/barrel in 2008.
peak oil theory holds that the cost of oil has a negative feedback effect on economic growth. As much of the economy runs on investment and debt in expectation of higher future growth, this caused a debt bubble.
without real economic growth, debt tends to default and investment fails to provide a positive return. This manifested itself as the 2008 mortgage crisis. From the article - "Schoar and her co-authors believe there was an increase in leverage among borrowers of all income levels. ... Once the economy slows down, then it becomes tougher for people to pay their mortgages, but also they have less incentive to pay them if the house is underwater."
This debunking of the commonly-held reason for the crisis is important because it points to a cause other than a systemic internal problem in the lending process. It then fits the post 2008 peak oil narrative:
the debt crisis pointed to a problem with global economic growth that cascaded through the financial markets.
the price of oil crashed in response to the sharply contracting economy, and the price fell to around $50/barrel.
massive reallocation of wealth in the form of Quantitative Easing restored a semblance of economic growth, albeit in an artificial and unsustainable form.
in response to the renewed economic activity, the price of oil climbed to the point that tapping expensive non-conventional sources became viable. That combined with the liquidity flood in the financial markets looking for something, anything, that offered a return on investment fueled the rapid growth of Canadian bitumen and US tight shale development.
however, the high costs of these oil sources probably added very little real growth to the world economy, as too much industrial effort is required to extract them.
as soon as QE ended in fall 2014, the economy responded to the lack of liquidity by stalling, and the price of oil collapsed.
Now, two years after QE ended, the world economy has stopped growing, and the price of oil has returned to the $50/barrel price point. At this price, a large amount of the world's oil is no longer profitable to extract, and global financial debt is at historic highs.
Over and over again, this seems to be the issue which will lead to collapse. Another iteration / undulation or two, and that will probably readjust our living arrangements for good. The question is, just how long will it ride for? I suppose that if central banks and governments keep buying oil and gas equities, this could roll on years longer.... but at the cost of a truly horrific ending.
Looking ahead then, in the next few years any remaining supply glut will be gone and the current lack of drilling and exploration will be coming home to roost, so it seems inevitable we will see another massive spike in oil prices.
In the past, this has meant a bananza in drilling, but I think oil companies are going to look at what happened in 2008 and 2015 and realize these high oil prices don't last long because a stagnant, over leveraged economy can't afford them. I have a hard time envisioning oil companies investing a lot of capex in going after ever more costly reserves while looking at a weak economy buckling under another price spike.
I don't even want to try to predict what will happen, but something has to give. I guess the economy crashes, and some kind of crazy government intervention happens. I try to avoid recency bias, but it's hard not to think that we might be very close to a serious collapse event. The politicians don't know what they're doing. The economists don't know what they're doing. There's no special agency waiting to swoop in and save us.
Trucks and SUVs are flying off the lots with 7+ year loans while car makers are temporarily shutting down the factories that produce smaller more efficient cars while they sell excess inventory of those.......
Not necessarily. Prices can only rise if the consumer economies can afford those higher prices (price is determined by demand, which also includes ability to pay that price). So far, economies aren't doing very well.
If supply drops off, and the price doesn't go up because no one can afford it, then yeah, we're toast anyway. I think a spike is more likely at first, but it wouldn't matter in the long run.