Links for 2010-01-13

Stuart Staniford, who earlier had been persuaded that global oil production might have already peaked, now comments on the potential for increased production from Iraq to push the peak up to a decade down the road.

King Banaian on disturbing developments in Argentina and Venezuela.

Economists comment on the role of the Fed in the housing bubble. Two in particular worth emphasizing:

Marvin Goodfriend: Interest rate policy was appropriately stimulative in the 2002-3 period. But rates should have been raised less mechanically and more aggressively in 2004-5 on grounds of the usual macroeconomic conditions…. A somewhat tighter stance of interest rate policy then could have cut off the last year or so of the house price appreciation and prevented the worst part of the subsequent adjustment.

Mark Gertler: If we could go back in history and make one policy change, I’d go after sub-prime lending. Absent non-prime lending, the likely outcome of the housing correction of 2007 would have been a mild recession like 2000-2001, and not the debacle we experienced.

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14 thoughts on “Links for 2010-01-13

  1. RicardoZ

    Mark Gertler: If we could go back in history and make one policy change, I’d go after sub-prime lending. Absent non-prime lending, the likely outcome of the housing correction of 2007 would have been a mild recession like 2000-2001, and not the debacle we experienced.
    Professor,
    This might make sense if the evidence showed that sub-prime foreclosures were greater than normal foreclosures but that was not the case. The reputation of sub-prime as the cause of the real estate crisis is a myth with no substantiation.
    Stan Liebowitz in his article “Anatomy of a Train Wreck: Causes of the Mortgage Meltdown” published October 3, 2008 observes:
    Prime foreclosures began their increase at the
    same moment (third quarter of 2006) as subprime
    foreclosures … Further, the prime foreclosure rate went into territory that was far above where it had been in the prior ten years, much more so than was the case for subprime loans. In percentage terms, the increase in foreclosures
    started from the second quarter of 2006 until the
    end of 2007 was 39 percent for subprime loans and
    69 percent for prime loans.

  2. K

    The next Fed Chairman should be someone who recognizes that keeping interest rates very low can contribute to financial bubbles. This is a fundamental point, central to the job of being Fed Chair. Bernanke’s stand on this issue should disqualify him from consideration for the position. This is not to be critical of the job he has done in preventing us from going into the abyss. For those actions, we can and should thank him profusely. But strictly on a going-forward basis, he is not the man for the job.

  3. ppcm

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aQGn5yummZEY&pos=1
    Above thread is providing a summarized testimony from the CEOs of major US banks.
    In essence:
    Leverages:
    Banks leverage
    Private individual leverage
    Too low interest rates
    No mention is made of money supply
    One may notice that leverages are not a one day matter:
    Series: DEBTSL, Debt of Domestic Nonfinancial Sectors (DISCONTINUED SERIES)
    http://research.stlouisfed.org/fred2/series/DEBTSL
    Consumer Revolving Credit Owned by Commercial Banks
    http://research.stlouisfed.org/fred2/series/REVOLNCB?cid=101
    INVEST, Total Investments at All Commercial Banks
    http://research.stlouisfed.org/fred2/series/INVEST?cid=99
    Leverage
    http://www.occ.treas.gov/ftp/release/2009-161a.pdf
    Thomas Fillipon table 1 P33 on evolution of the share of Non financial
    corporate credit over GDP
    http://pages.stern.nyu.edu/~tphilipp/papers/finsize.pdf

  4. jake_gittes

    I read Stuart’s article on The Oil Drum and was struck with what appears to be a fundamental problem in the arguement. In the past decade I believe (based on a back of a beer soaked napkin calculation) that at least one trillion, and probably more in the neighborhood of between two and three trillion, USD have been spent worldwide in the hope of increasing the production of hydrocarbons. The result; essentially no increase in worldwide production. Where will the capital come from in the next six years to incrase production in a single country by approximately 600%. While the analysis of hyrodcarbons in place and the current physical possibility of extracting them may be correct, no one will be able to fund it. And if it is such a tremendous opprotunity, why was Sonangol awarded one of the premium contracts?

  5. Mark S

    I really enjoyed King Banaian’s remark about Martin Redrardo (Argentina’s Central Bank director) having been reinstated to his job by the Supreme Court after being fired by Cristina Kirchner. Redrado had refused to to retire $6.6 Billion of Argentina’s sovereign debt with Central Bank reserves.
    In contrast, Ben Bernanke had little trouble announcing that the FED would buy $300 Billion in Treasury securities, and $1.45 Trillion in agency debt and securities.

  6. Mike Laird

    RicardoZ – try running the comment that “The reputation of sub-prime as the cause of the real estate crisis is a myth with no substantiation.” past the CFOs of several failed banks, and run it past some hedge funds and investment banks who owned derivatives based on tranches of sub-prime mortgages. The numbers cited above fall into the category of “balancing equations”. Financial managers who had to “balance the cash account” have a very different view of what sub-prime mortgages did to them.

  7. Cedric Regula

    Mark S
    This has been a recurring problem throughout history. In 17th century Europe and England, in spite of the fact that all royalty seemed to be related and they all dressed gay as hell, they did nothing but make constant war on each other.
    This of course was costly and led to innovation in government and finance. The greatest innovator(IMO) was King Charles II of England, and he should probably be given credit for birthing both the modern banking system and modern government finance.
    The first wars he conducted against the Dutch were costly, including having to replace half the Royal Navy after the Dutch sailed up the Thames and sunk the fleet parked outside London. First he reneged on all government(Crown) debt to improve government finances. This caused fear of owning government debt among the populace, and goldsmiths began to fill the void by offering safe storage of gold, then issuing gold backed notes to depositors which could be used for making payments on purchases. Checking was born. Soon Goldsmiths realized they could sell gold backed notes, without being 100% backed up by gold. Fractional reserve banking was born. But a scam as good as this needed support from the King and Charles II gave it when they agreed to lend gold to Charles II who gave them wooden markers in return.
    Fearing for his social security, and scheming to go to war with the Dutch for the third time, Charles II entered into the secret Dover Treaty with France. The King of France agreed to pay funds to Charles II for current court expenses and a stipend should the King find a need to retire. (Charles I was beheaded by Puritans, and Charles II spent a few years of exile in France until he could find a way to kill Cromwell) In return, Charles II promised to ally the Royal Navy with the French Army in a third Anglo-Dutch War.
    Hopes for a quick victory were dashed when Holland opened up the dikes (these are like dams holding back the ocean) and flooded lands surrounding Amsterdam. That stopped the French Army advance, and the Royal Navy still was inferior to the Dutch Navy and had trouble winning at sea. The Allies hoped a cold winter would allow the army to advance over ice, but a short bout of global warming prevented much freezing, and much to the horror of the French, where there was ice they were met by heavily armed ice skaters which skated circles around French foot soldiers, as it were.
    So the war became a long siege with neither side able to gain decisive victory, and Charles II depleted his coffers. So he relied more and more on draining physical gold from the goldsmiths. Rumor has it he resorted to “borrowing” at musket point because goldsmiths began worrying about credit risk. But soon the public began finding out that that goldsmiths didn’t have the gold on hand that the public believed was theirs and England suffered it’s first, but not last, banking crisis.
    But at least it’s a good thing that this can’t happen in this day and age. At least the part about the armed ice skaters.

  8. E. Barandiaran

    Regarding Latin America, despite what King writes about Argentina and Venezuela, it should be noted that since 2004 all LA countries have benefited greatly from the large increases in the world prices of commodities. Most countries have been saving a large share of the windfall, even in countries where the main beneficiary is the government. Argentina and Venezuela are the two main exceptions.
    In Argentina, farmers have benefited from the huge increase in the price of soy and the government has been struggling to steal the windfall profit. The last attempt has been to steal the international reserves but Martin Redrado, the central bank governor, has realized that the political fortune of the government has changed and so he has been resisting this attempt. It should be noted, however, that this has happened many times since the Great Depression, and especially since 1951.
    In Venezuela, Chavez is the main beneficiary of the huge windfall profit from oil. He has spent all this gain and more and now he has a cash problem so he has devalued the currency because he is the main beneficiary of a devaluation (his problem is to delay as much as possible the increase in the domestic prices of imports). His policies are collapsing but he still has enough power to repress any opposition.
    There is a huge difference between Argentina and Venezuela. In Argentina, the Kirchners know that they will have a hard time to win the next election and so they need money to buy votes. Most likely, however, they will be out of power by 2012. In Venezuela, as his good friend Fidel, Chavez wants to stay in power forever. Thus, he needs to repress the opposition without lowering the living standards of the poor. Chavez’s fate depends on the price of oil.

  9. Unsympathetic

    That link in the WSJ is execrable. I hereby sentence each of those so-called “professionals” to read 100% of Tanta’s posts over at Calculated Risk.
    “Subprime” HAS NO MEANING. The definition of a “subprime” borrower in 1990 is today known as a “prime” borrower.
    Standards slipped because everyone was making money through the origination of loans. “Subprime” back in the day did of course default at a higher rate than prime.. but nowhere near today’s rates. Rather, subprime only became an issue when the 3 C’s were abandoned, and all loan approval was done by programs that could be gamed.
    If we had simply held the 1990 industry standards wrt the definition of the buckets (Prime, Alt-A, subprime) and not allowed the players to push the bottom end of the subprime bucket further into the muck, we would simply never have had this recession.
    Of course, we’d also never have had the housing bubble, but that’s a different thread entirely.

  10. Cedric Regula

    ppcm,
    Yes, after losing the 3rd Anglo-Dutch War, French and English climatologists were alerted to the dangers of global warming and developed climate models which ultimately allowed General Jean-Charles Pichegru of France to time his invasion of the Netherlands to take advantage of sub zero weather, thereby taking away the Dutch dike wildcard.
    Jean-Charles picture here:
    http://en.wikipedia.org/wiki/Pichegru

  11. zeke

    Like “jake” I read Stuart’s article on The Oil Drum. My problem with it is a simple one. Predictions of future production are simply predictions. One may as well get out a crystal ball. Any article filled with maybe’s, should’s, could’s and ought’s is fantasy and, in my world, treated as such. As the energy situation builds into the future, we will hear countless promises, predictions and hopes. My hope is, at some point, America will develop an energy plan. Rest assured, I’m not holding my breath.

  12. GNP

    I would suggest to Stuart Staniford that rent-seeking activities–domestic and international–are keeping a large number of barrels of oil in the ground. Politics manage to keep many oil basins under-explored relative to current technology potential such as 3D seismic and horizontal fraccing techniques.

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