The conventional wisdom has it that the recession is the result of the toxic loans which caused the credit crisis leaking into the rest of the economy. As a story it’s always had a bit of a hole in it for me; the length of time between ‘debtonation day‘ in August 2007, when the banks stopped lending to each other, and the start of the recession a year later. The economist Jeff Rubin has suggested that the recession was caused instead by the high oil prices earlier this year.
A post in the Oil Drum summarises the argument like this:
These higher oil prices caused Japan and the Eurozone to enter into a recession even before the most recent financial problems hit. Higher oil prices started four of the last five world recessions; we shouldn’t be too surprised if they started this one also… Rubin observes that it isn’t surprising that Eurozone and Japan entered into recession before the United States did. The United States is less sensitive to oil price spikes because it is itself an oil producer (5 million barrels out of 19 million barrels the US consumes are produced in the US), so it receives some of the benefit of the higher prices.
One of the relevant factors is just the comparative scale of the flows of funds in the oil spike is much larger than the deflation caused by the property market. “Over the last five years their annual fuel bill has grown a staggering $700 billion. Of this, $400 billion annually has gone to OPEC producers.” One of the reasons that this leads to slump is because it’s not neutral: money is transferred from economies with low savings rates (where it gets spent) to economies with high savings rates (where it doesn’t).
From Rubin’s perspective, of course, this could be regarded as good news, since it might support those who believe that we’re more likely to see a short sharp recession.
Some of the best research indicates that it takes about a year for an oil price shock to have its maximum impact on US GDP. Leading macro and energy economist James Hamilton notes these lags fit the experience of past shocks, including the OPEC-induced recessions of the 1970s. … It has also been found that a similar lag structure holds for the impact of large declines in oil prices. … the impact from the even larger decline in oil prices over the last two quarters should give its maximum boost to the economy moving into 2009.
I’m persuaded by quite a lot of this: I think the attention paid to the credit crisis is a classic example of cognitive bias (dramatic events are amplified by the politics and media, and and causality ascribed as a result).
But at the same time, it’s also clear that the credit crisis has compounded the problems caused by oil-price recession. All recessions have their own characteristics, and in this case the notion of a credit crisis which developed largely independently of energy costs is a point of difference. The recession in the financial services sector is disproportionate as a result, and the fragility of the banks’ balance sheets means that they are less likely to extend credit lines, or to roll over existing loans as they reach the end of their terms – even if their state shareholders think they ought to be.
And related to this – in the US and the UK – is the extend to which consumers have reached the limits of their ability to absorb debt. Consumer-driven growth – or consumer-driven recovery – needs consumers with disposable income to dispose of. The fall in oil prices helps take some of this pressure off household budgets – as long as companies pass it on rather than using it to rebuild their balance sheets.