Thursday, April 09, 2009

The Global Financial Meltdown Did Not Start in the U.S.

Alan Reynolds in an article on the Cato Institute site concludes that President Obama, and other G-20 leaders, have it wrong.
At the recent meeting of G-20 nations in London, officials from many nations agreed on one thing -- that the United States is to blame for the world recession. President Obama agreed, speaking in Strasbourg of "the reckless speculation of bankers that has now fueled a global economic downturn."
The article shows that the recession did not start in the U.S., and that the speculation of bankers was not the cause of the recession or the financial meltdown.

Instead, he lays the blame for the global meltdown at the feet of the oil cartel, and the price of petroleum.
What really triggered this recession should be obvious, since the same thing happened before every other postwar US recession save one (1960).

In 1983, economist James Hamilton of the University of California at San Diego showed that "all but one of the US recessions since World War Two have been preceded, typically with a lag of around three-fourths of a year, by a dramatic increase in the price of crude petroleum." The years 1946 to 2007 saw 10 dramatic spikes in the price of oil -- each of which was soon followed by recession.

In The Financial Times on Jan. 3, 2008, I therefore suggested, "The US economy is likely to slip into recession because of higher energy costs alone, regardless of what the Fed does."

In a new paper at cato.org, "Financial Crisis and Public Policy," Jagadeesh Gokhale notes that the prolonged decline in exurban housing construction that began in early 2006 was a logical response to rising prices of oil and gasoline at that time. So was the equally prolonged decline in sales of gas-guzzling vehicles. And the US/UK financial crises in the fall of 2008 were likewise as much a consequence of recession as the cause: Recessions turn good loans into bad.

The recession began in late 2007 or early 2008 in many countries, with the United States one of the least affected. Countries with the deepest recessions have no believable connection to US housing or banking problems.

The truth is much simpler: There is no way the oil-importing economies could have kept humming along with oil prices of $100 a barrel, much less $145. Like nearly every other recession of the postwar period, this one was triggered by a literally unbearable increase in the price of oil.
Read the complete article.
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posted by Gary Aminoff at 8:28 AM

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