James Hamilton on the Oil shock of 2007-2008

The "clogged" financial system never stopped trying to get me to take out more loans during this entire time. Somebody apparently forgot to tell the guy I got my mortgage from that nobody was making loans anymore. Imagine the offers I would have had if I had been employed! The only thing that happened in the financial system was that is reverted back to sanity. And Obama is trying to bring it back to insanity.

Robert Higgs says the statistical data doesn't support the existence of a "credit crunch" in 2008.

If this is true then what am I to make of TARP and Obama's stumulus?

Here's the link.

http://www.independent.org/newsroom/article.asp?id=2402

I haven’t read the paper yet, must my first thoughts are that lot of prices went up at roughly the same time as oil. All commodities went up as did housing and the stock market. To say that oil was the primary culprit, you would need to include them all in a model in order to see which had the greatest effect, but then you would have a lot of correlation between the different prices so you wouldn’t be able to tell which price had an effect. In other words, it seems to me that the oil price is a proxy for the general increase in the prices of all commodities as well as real estate and the stock market.

High commodity prices do contribute to depressions because they cut profits in capital goods manufacturing to the point that many businesses have to lay off workers or go under. This is part of the Austrian business cycle, which explains that high commodity prices happen when low interest rates encourage both investment in new production and purchases of consumer durables. Both use commodities as inputs, especially oil. During a depression, there are idle supplies of commodities, so the increased demand just soaks up the excess. But after the idle resources are used up, the increased demand caused by the low interest rates causes high commodity prices and eventually lay offs.

Crawdad: "If this is true then what am I to make of TARP and Obama's stumulus?"

Great screen name! I love crawfish etoufe (did I spell it right?). Anyway, I have read Higgs and others say that. It appears that Paulson and Bernanke became hysterical when their buddies at Goldman Sachs started losing money. In fact, it appears that the whole AIG bailout went to pay Goldman Sachs on the CDS's they bought from AIG. All of the stimuli and resuce packages should be relabeled the Goldman Sachs rescue plan.

Did world petroleum production grow a slower rate 2005 to 2008? If not it was not an Oil shock but an inflation shock.