Can the Oil Shock Alone Explain the Financial Crisis? - The Atlantic Business Channel

Can the Oil Shock Alone Explain the Financial Crisis? - The Atlantic Business Channel

I think the way the economist James Hamilton used the "oil shock" effect on GDP, is illustrative of part of the story of what went wrong in the USA.

Is it just far too "reduced row" to accurately explain everything else, including the housing price collapses in many markets, the Bush war economy spending, and the excess credit over savings, in both personal and government accounts, including imbalances in trade, particularly with China.

Well, that is what "reduced row" models in economics do: they make a black box of the constants , the parameter estimator and error estimator.

Frankly, I would buy into the explanatory power of the oil shock (read the article!)

Now with Obama making diplomatic gestures worldwide, particularly to Venezuela, a country that used to supply the US, this type of leadership may cower oil powers elsewhere to go "hold on a second, if we keep the price up, a) we get hurt too, b) our oil will never be optimally recovered i.e. it will get replaced by a substitute and we will have nothing to sell."

Most Americans I feel would love to let the remaining oil stay in the ground, including the oil in the tar sands of Canada.

Add in "peak oil" stories that hit the summer of 2008, to play to the fear that the markets were telling us by price alone, to drive up prices further, and yes, what Hamilton and his interpreters say is more than plausible. The recession was inevitable but those stories were not plying the media as was fear itself.

Interestly, the National Bureau of Economics Research, NBER, said the US recession began in January 2008: did anyone notice? (Hamilton BTW states' Q4, 2007)

In Canada, a net oil supplying country, our effects were mitigated by a transfer of wealth and economic activity to Alberta and Saskatchewan, with the economic powerhouse of Ontario in likely the same state as the US as a whole. Now all of Canada is hurting, just as much as the US is, and our unemployment is likely to be stickier than the US for a variety of reasons. Our dollar will likely head lower too as oil does not recover as it did in the past with economic activity still projected in the US to be weakening. If it does recover, we have "stagflation" and the very risk our Central Banks are going to fight dearly against, a stagnant economy, with high unemployment and rising prices.

So, as the science so dismal might say, its far from over with the beginning of growth distant in North America, with but small seedlings planted to stop further erosion.

When will those seedlings grow? I would estimate 2011 in my own experience as the pain has yet to fully hit Main Street.

The de-industrialization of the US as well was likely not in the thought process or planning horizon of "the Interdependencia" groups that effectively globalized the world economy, under US leadership, through the late 70's to now. There does not seem to be a way of going back, and forward? What will be left of the industrial might of the US? And of course, will this lead to dangerous misperceptions?

More questions than answers.