OIL’S ENDLESS BID

Real resources are always a true constraint for any economy.  This has become an increasingly important point over the last 10 years as commodity prices have surged.  But the debate over the cause of this surge and the lack and real resources is still very much up in the air.  Some say it is due to an insatiable demand from China.  Some blame the decline of the dollar due to irresponsible government action.  Others say Wall Street is cornering the commodities markets and turning it into another profit making casino.   The truth, in all likelihood, lies somewhere inbetween.

One of the more important themes I’ve discussed over the years here has been the financialization of our economy.  Financialization has seeped into many facets of our economy in order to help the big banks maximize profits.  This has led to massive deregulation, increasing reliance on the FIRE industry, a concentration of power in this industry and an economy that is increasingly volatile and dependent on this industry which produces little, but takes much.   This financialization has been nowhere more apparent than it has been in the commodities markets.

A few weeks ago I wrote a piece about the continual imbalance in the commodities markets and a veteran of the energy market happened to be reading.  Dan Dicker reached out through the comments section and offered to send me a free copy of his book, Oil’s Endless Bid (see here to buy a copy).  I had heard of Dan’s book and had been meaning to read it for some time.   Now, I get a lot of free books from financial people.  A LOT.  They all want me to promote their books on the site.  95% of the books never get mentioned on the site.  As you’ve noticed, I don’t just crank out content for the sake of cranking out content and the “payment” of a free 300 page book is not really incentive enough for me to write about a book.  So, a lot of books end up in my fireplace (I’m an energy conservationist obviously).  This one is different because I think Dan is conquering an incredibly important subject and he does so from the position of an informed insider.

His perspective is very much in-line with the positions of Michael Masters who has been one of the more vocal proponents of this financialziation of the commodities markets.  Dan Dicker is a 20+ year veteran of the oil markets and a long-time seat holder at the NYMEX.  Dan’s book is a frighteningly eye opening perspective from someone who has been in the trenches and has witnessed the massive changes in real-time.   Dan highlights the massive changes that occurred over the years as the industry has morphed from one that was dominated by big oil into an industry that is dominated by big banks (from the book):

“In the mid-1990’s, the participants and performance of oil trading slowly started to change, and by 2003, the dominating forces in oil trader were no longer with the oil companies.  The list of NYMEX seat owners again shows just how deep the change was.  Right before going public in 2006, only 22 seats remained in the hands of the oil companies that had direct involvement in the buying and selling of oil and oil products.  But a much more significant percentage of seats were owned by companies that ostensibly had nothing to do with the buying and selling of physical oil.

  • BNP Paribas: 9 seats
  • AIG: 6
  • Merrill Lynch: 5
  • Bank of America: 4
  • Barclays: 4
  • Citigroup: 4
  • Deutsche Bank: 4
  • JP Morgan: 4
  • Morgan Stanley: 4
  • UBS: 4
  • Bear Stearns: 3
  • Goldman Sachs: 3
  • Lehman Brothers: 2

That’s a total of 56 seats owned by investment banks!  (And yes, I include AIG, which was an enormous booker of bets on oil too, not just in famously bad mortgage swaps.)

Of course, the most important purpose for some of these firms to own seats was to execute orders for clients, some retail, but many commercial clients who were being sold on the importance of risk management of energy costs.  And during the years from the mid-1990’s though 2005, this made for a legitimate increase in the volume of crude.  But commercial growth of risk management programs was a happy appetizer for the quick rise of the investment banks in the trade of oil.  Oil companies that tried to maintain a presence and dominance in trading began to be overshadowed by the volume and influence of trading from these banks and their clients.”

These firms aren’t dominating the trading pits at these exchanges because they want to buy and sell commodities for real economic purposes.  They are dominating the exchanges because they know there is big money in financializing the asset class of commodities.  And they’re succeeding.  They’ve sold the asset class as an investment and the investing public has eaten it up hook, line and sinker.  Dan goes into much more detail about this destructive trend and its impact on the economy and ultimately concludes that massive change is needed.  We need to get control of our economy again and wrangle it back from these big banks who are looking out for the interest of their shareholders and not the US economy.  Dan Dicker’s book is one of the most important ones I have read in a long time.  It should be required reading for the US Congress.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Hat Trick

    It is a sad fact that a lot of the names on the list above are also the firms that were bailed out a few years back. The destructive forces of capitalism should have been allowed to cure this problem. Now regulation is required, but is it really possible?

    Overview:
    Step 1. Create a monster
    Step 2. Let monster run amok
    Step 3. Monster nearly kills self
    Step 4. Save monster
    Step 5. Monster runs amok again
    Step 6. Try to regulate monster as it is stepping on your throat

    Will step 6 work, or will we have another repeat of step 3?

  • Athena

    Ok, I’m sold. I’m not at all surprised, so I may as well delve into the details.

    Sigh.

    But in all fairness, I expect you to read my haiku collection. I will send them to you shortly and eagerly await your public review on TPC.

    Thanks!

  • LVG

    I read his book earlier this year. That list of names blew my mind when I first read it. It’s so sad that we let these firms just gamble away with the future of our economy and get away with it in the name of “free market capitalism”.

  • VII

    ” destructive force of capitalism”

    It is not the fault of tobacco!

    Capatalism is not the problem….don’t blame the gold fish for the dead bird. Meow!

  • Wulfram

    I found this to be a very good article. http://www.businessinsider.com/chris-martenson-peak-oil-could-limit-economic-growth-2011-11

    We should be more worried about this. I think the commoditization of oil, although harmful by raising the price of oil by 15-20 during a BSR, is not even the most damaging effect. Although it is likely making us develop alternatives earlier than we would otherwise, financialization is far more damaging by occupying our attention.

    Our concern for the financial aspects of the economy is distracting our government from investing the time, political, and monetary resources into alternatives. It is also impeding our scientific progress by making science as a career unattractive compared to finance.

    The future of energy will not be developed in someone’s garage. It will take millions if not billions of dollars of research and infrastructure environment to make any new energy system viable because of switching costs. We will also need to do this sooner than later, since cheap energy will be necessary to make the switch.

    There are massive opportunity costs to switching to a different energy systems. If we want to switch to LNG, for example, we need totally different storage mechanisms. LNG must be cooled during transport and storage. It takes energy, and time to develop this new infrastructure. In addition, because LNG must be cooled it would take energy just to store it.

    Compressed natural gas has similar problems. Making pipes and containers air tight is more difficult than transporting liquids, especially if something bad like a leak occurs. Similar problems exist for hydrogen fuel cells, solar, biofuels, etc.

    The implications if we don’t solve our energy problems are enormous. All resources require energy to extract. Copper, iron, steel, agriculture, transport, even maintaining our military all take energy. As energy costs increase, our growth will decline or even enter contraction category making debt service extremely difficult.

  • kman

    Wulfram I agree with you on the tradeoff between science and finance for graduates, but we can easily change this by levying a tax on the finance sector that goes into science/R&D/…..but you know it takes a product visionary to CREATE and develop stuff.

    Financial innovation is good, it’s one leg for the economy to stand on, we just need to get the others working again, or something new.

    “So, a lot of books end up in my fireplace (I’m an energy conservationist obviously).”

    and you’re funny too.

  • Chewitup

    EVERY name on that list was bailed, swallowed or failed.

  • Bill

    I have not rerad Senor Dicker’s book, so please take my comments with a grain of salt. This is an awesome blog and it feels a little weird voicing an opposing opinion.

    That said, perhaps it makes sense to consider this: at least 33% of the world’s oil is produced by countries that need the price of oil to stay above $90 to fund fiscal spending. That’s OPEC and Russia and a few other countries. There are probably more. IMO, many producing governments most definitely have an incentive to keep prices high.

    And what about natural gas? I don’t see Mike Masters complaining about the low price of natty gas. Is gas offered by the banks systematically to the same extent that crude is bid by the same jokers? Why stop there. Is there a systematic bid for equities, too? I’d argue that the systematic bid for equities dwarfs that for energy products.

    I do believe a small percentage of *total* retail and instutional investment money has made its way into the crude complex via the various commodity indices. But let’s remember that there’s a buyer for every seller out there: the guys @ J. Aron are not long-only.

    Every contract that trades in the energy markets has both a long and short side. I think it’s disingenuous to assume the banks are keeping prices high via their trading. Yes, bankers want to maximize fee rev by keeping AUM in energy funds as high as possible. But it is crazy to assume that traders at those same firms would sacrifice their trading PnL in exchange for trying to keep energy prices / AUM high. The traders want to get the price right, that’s all. They don’t care if it goes up or down, they just want to get the price right.

    The energy markets are some of the most efficient markets in the world. If there’s a “sytematic” bid for energy, let’s look at the Fed and its policies to drive money into real assets, as well as the incentive many producing countries have to limit supply. Supply and demand always win, just look at natty gas.

    A final comment from one of the best trader’s on the planet, I’ll leave it to you to guess who it is. To be fair, thought, I have no idea how he feels about banks trading the energy markets, though if traders at banks increase liquidity via speculation, he’s probably okay with that:

    “You look at an overall homeostatic system involving the price, if you speed up the process [to] stabilize the system, it will get the price there faster, then the producers start to produce more and the consumers start to consume less earlier, so the system doesn’t get as far out of balance because there are speculators there.

    “If there weren’t any speculators, what would tend to happen is we would run out of stuff, and all of a sudden there wouldn’t be any and the price would go from 50 to 50,000 over night, and then there wouldn’t be any work, no jobs, production would dry up a huge amount, then there would be a big crop [and] no one would use it. Then, five years later they would build another bakery and all this kind of stuff. So, the speculator getting the price up a whole season earlier stabilizes the economy despite what they say about speculators destabilizing and being villians; speculators stabilize the economy and set the price where it is supposed to be.

    “Alternative ways of steadying the price are by a government official deciding what a good price should be, based on what his friends are telling him. That’s basically a destabilizing way to do it. The way that’s the most stable that anybody has been able to come up with is we have speculators. As long as there’s a need for it and there’s a need in the overall economy the benefit of it is it tends to stabilize the economy, and set the price and make sure that all the people that want it are getting it, and all the people that want to produce it are employed. It kind of matches everybody up and that’s a very important function and it pays well to have that job as a speculator.

    “There are two parts, one is knowing the value — that’s the fundamentalist; the other is getting the price there quick. Getting the price there quick is the job of the trend-follower. Stabilizing, getting the price there. There is a reason why, there’s a justification, why we exist, why it goes on forever, far as I’m able to see and as far back in history there has always been big moves, and the patters are about the same.”

  • http://dandicker.com Dan Dicker

    Cullen,

    Thank you so much for your time and the glowing review of my book — saying that it “one of the most important I have read in a long time……” was high praise from someone I believe to be one of the sharpest minds in the financial blogosphere.

    keep up the good work — and now that you’ve written the review, you are now welcome to ‘recycle’ the book in your heat generation device —

    best regards –

  • http://dandicker.com Dan Dicker

    I happened to chance on this comment from @Bill — and his rationales are the EXACT reason I wrote the book. Every one of them is common, misunderstood and dealt with in my book — And every one of them is entirely WRONG.

    For those who choose to read it, and not be convinced by their own intuitive (and understandable) misconceptions about commodity trade and oil in particular, I promise a full understanding of how oil is REALLY priced.

    And it’s a fun read…………

  • Mightybillfuji

    The real issue with oil is a lack of easy production from a panoply of aging supergiant cheap production fields, massive geo-physical challenges in the new oil zones like oil sands, ultra deep water etc, and now massive political challenges that piggy back on the physical (such as Venezuela nationalizing everything then being unable to phsyically produce the oil or the BP disaster shutting the GOM down for a year). Lets throw in the general “resource curse” problems in a higher price environment for commodities (see Libya, Nigeria, Iraq)

    On the demand side China uses 300% more oil and NG now than it did in 1990. 300%.

    Perhaps the financial issues are there in the minority but they aren’t the majority by a long shot. And how many of the actions taken by the big banks are for the explosion of Junior oil producers who are employing hedging programs but can’t have their own seats? CHK for example or LINE the MLP employ massive hedging programs but they do not obviously own their own seats on the exchanges?

  • Bill

    You are hiding behind your book, Dan, without really saying anything. If my points are all ENTIRELY wrong as you suggest, convince me here. For you and Cullen to point out that 50+ NYMEX seats are now owned by banks, so what? Really, that’s the only “argument” that’s been posited here so far.

    News flash: capital is capital. Because a greater percentage of it used to be backed by XOM and locals in the pits, that’s a good thing? I used to shop at Ace Hardware but now Home Depot runs the show. That’s a bad thing?

    We need more speculation, not less. Speculators get the price where it needs to go. Talking about the virtues of having only the E&P companies (“real users”!)trade energy is asinine. Maybe Blackrock, State Street, Vanguard, etc. should be the only ones allowed to set stock prices. Right, that makes sense. And Italy and Spain should be the only ones to trade Spanish and Italian debt. “See, I paid par for your bond and you paid par for mine.”

    So the benchmark for determining who gets to trade is deciding who “buy[s] and sell[s] commodities for real economic purposes”? Exscuse me, but the guys at Morgan Stanley have just as much “real economic purpose” trading crude as does HES. Their job is the same: get the price where it should be.

    EVERYONE’S JOB IS TO GET THE PRICE WHERE IT SHOULD BE. That’s the point.

    Moan all you want about the changing composition of who dominates trading. That will continue to change, it always has. Right, XOM and CVX and BP all have my interests at heart. XOM wants as much as it can get from me at the pump, that’s a fact.

    The job of the guys @ J. Aron is to make money. The job of the guy @ Tudor trading crude is to make money. Same for the guy at Milburn Ridgefield and John Henry and Graham. They do that by taking the other side of what they think are stupid trades. Everybody’s job is the same: get the price where it should be.

    And to say that Fed policy has no bearing on the fact that all commodities are up, up and up, that’s bunk. The largest central bank on the planet is trying to stabilize our economy by pegging stock prices higher than where they otherwise would be. They’ve said so expressly.

    The drive to end the debt problems via QE, a.k.a. financial repression, is most assuredly pushing money into commodities / energy. That’s a policy issue. Blame the banks for that? Blame Bernanke. The job of the traders is to get the price where it should be. Bernanke wants to inflate debt away, you better believe oil’s going higher.

    Arab spring in 2011? Nah, no effect on crude. China’s massive capex buildout and commodity stocking frenzy, nah, no effect.

    For the record there was a pretty nice bear market in crude from 7/08 through 3/09. The bid wasn’t endless then.

    I’ll read your book.

  • Texan

    “Supply and demand always win” in the long run…….but tremendous damage can be caused in the mean time (Housing market).

    I am pro free market and reflexively side with less government intervention…….but the financial industry needs to be reined in.

  • http://www.pragcap.com Cullen Roche

    Thank you Dan. It’s a controversial topic as you know, but one we must better understand. Your book goes a long way in helping us achieve that so thanks.

  • Bill

    Cullen, thanks for an awesome blog. I will indeed read Dan’s book, I’m sure I will learn a ton. P.S. Misappropriating a quote from Wedding Crashers: “Big tree fall hard.” In other words, I am more than willing to change my tune after learning more. Peace.

  • http://www.pragcap.com Cullen Roche

    Bill, I think the truth likely lies somewhere in the middle. Is the speculating all to blame for the surge in oil? No. But I find Dan’s case compelling. I think it rounds out the debate nicely and contributes and important inside look into the real goings on.

  • http://dandicker.com Dan Dicker

    Thanks for your comments Bill — Indeed, your views are well informed, I would simply argue that my case — mostly misunderstood and not widely examined — required a book to deliver cogently and with rigor…….

    I am afraid that this argument does not lend itself to quick blog posts, nor 2 1/2 minute segments on CNBC — believe me, I have tried.

    The changeover in membership ownership at the NYMEX is one of dozens of proofs lending to a case that I make in the book — taking on that ONE piece alone in a blog post is dealing with the argument entirely out of context. It is merely the one that Cullen found instantly compelling — read the book, you will find dozens more…….

    And if you do go through with your plans to read the book, please tell me again how your views have, or haven’t changed. At least then, you’ll have my argument – whole.

    dandicker@gmail.com

  • VII

    “Free markets work – provided that they operate within a framework of government policy that enforces property rights, provides reasonable regulation, coordinates objectives that cannot be achieved privately (e.g. certain infrastructure, insurance coverage for pre-existing conditions – which otherwise creates an adverse selection problem even for companies that would like to offer it), and maintains reasonable consumer protection (because there is a huge “information problem” in requiring each consumer to have all of the requisite facts to avoid abusive practices). To blame our economic problems on the free market is an insult to what has proved for centuries to be the most effective economic system for creating prosperity and raising living standards. We would be wise to stomp out the incessant policy of bailouts and monetary distortions if we hope for that to continue”
    DR. J….Hussman

  • Adam2

    By heat generation device. You mean his blog participants.

    Like me. Hey Cullen – Send it my way. ;-)

  • Adam2

    Hi Dan and Cullen,

    What do you think of Randy Wray’s analysis found here.

    http://www.economonitor.com/lrwray/2011/09/22/the-biggest-bubble-of-all-time-commodities-market-speculation/

    Especially the part where pension players like Calpers play in the speculation game.

  • http://www.pragcap.com Cullen Roche

    Send me an email with your address. I’ll mail it to you.

  • yibberat

    Cullen — Why are you asserting that financialization has led to “deregulation”? What led to “deregulation” was GLOBALIZATION.

    Regulation that was previously national in scope (eg Glass-Steagall) violated new supranational agreements (eg the 1997 WTO Agreement on Financial Services). So either the old “national” legislation had to be modified/scrapped to fit the supranational agreements or a country would face WTO sanctions. Europe never had a “wall” between investment banking and commercial banking — and they have more votes in the WTO than the US does. Glass-Steagall was thus modified to fit the European notions that were entrenched in the WTO agreement. That is NOT “deregulation”.

    I personally am getting really sick of this crappy meme floating around that deregulation has been the cause of this or that or the other. THERE HAS BEEN NO DEREGULATION. What there has been is a loss of sovereignty – and regulation has moved from national accountable legislatures to nonaccountable supranational organizations run by the Davos crowd.

    No question that the FIRE sector has played a huge role in advocating this move beyond national borders. But so have Main Street multinationals, the UN-sponsored non-profit NGO’s, one-world socialists/dreamers, tenured academics who are ideological crusaders of one stripe or another, diplomats who are more loyal to their profession than their nation, and the plethora of cultural jet-setting Davos men/women.

    If there were ACTUAL deregulation – ie FEWER rules; then it would have manifested as an increase in freedom of action by the small players. Those are the players who are not ever present when the rules are established but who indirectly can have a slight effect via periodic elections. What has happened – in FACT – is the opposite. The big players moved the arena of regulation BEYOND the nation-state — where their influence is far more complete and where there are no “elections”. And by that change of venue, the big players – in ALL political/economic/cultural/etc sectors – have now completely crushed “the small”.

  • http://www.pragcap.com Cullen Roche

    Come on Yibberat. Globalization didn’t cause the housing crisis or force these big banks to lever themselves up the way they did. They did all of this on their own volition because there were no rules to stop them. You want two simple rules that would ensure this crisis never occurs again? Move OTC derivatives onto a regulated exchange with leverage limits and put a 20% down law on housing. There, no housing crisis ever again. But we won’t do reasonable things like that because the free marketeers like yourself have this myth in their mind where the market regulates itself. Greed rules the markets Yibberat. And greed poisons a capitalist system if it is not harnessed. You don’t seem to appreciate that reality of human nature. Disappointing that Austrians always miss this basic human behavior.

  • yibberat

    Globalization most certainly created the specific risk and tier capital rules of the Basel Accords. For example, the treatment of AAA rated mortgage loans. Or of sovereign debt. Or virtually everything that has created cross-border and globalized crises.

    The housing bubble was not unique to the US – nor was it caused by the US. We certainly had a different manifestation of it — but the source of it is the rules that the Basel Committee on Banking Supervision sets up. The US housing bubble was not even particularly “bubbly” – compared to Ireland, Spain or now Australia. Here is housing bubble in a few countries — http://thenewmortgagecompany.files.wordpress.com/2010/07/10-key-charts-price-global-housing-bubble-by-housingstory-net-2.jpg

    and a paper by the St Louis Fed in 2004 describing how the supranational regulatory shift from Basel I to Basel II in the US affects mortgage borrowers – http://www.stlouisfed.org/publications/re/articles/?id=363

    This is NOT deregulation. It is supranational regulation by the unaccountable and invisible (and proven to be incompetent).

  • http://www.pragcap.com Cullen Roche

    So, let me ask you a simple question then. If the USA had implemented a 20% down law in 2000 do you think there would have been a housing bubble in the USA?

  • yibberat

    Oh – and re “greed” — more accurately self-interest (but that word doesn’t evoke the same evil does it). Competition – not “markets” (and esp not some cartelized manipulated charade called a “market” in order to obliterate actual free – read COMPETITIVE – markets) is what harnesses “greed”. Not by denying that it exists. But by setting up a big bulls-eye on the back of the entrenched – so that they can never keep any of their excesses – because there is always someone else out there who is both “greedy” and “hungry”. The greedy do not go after the poor. that’s not where the money is. They go after the rich. That’s where the money is.

    I guess it is good that government is staffed by altruistic wise angels. hahaha.

  • Cowpoke

    Cullen, I hope you Minored in Philosophy

  • yibberat

    I doubt it. But the 20% down rule was not scrapped in order to deregulate anything. It was scrapped in order that politicians could kiss babies and promise the maximum number of voters that no matter where they lived or what they earned or what they had as a down payment, that they too could “own a home”.

    The free market did not create that nonsense. Politicians did. And those same politicians created the mechanism by which original lenders could dump that toxic hot potato onto some sucker.

  • http://www.pragcap.com Cullen Roche

    Ah yes. We just need more competition. Did MF Global not have enough competitors for you? Lehman? Bear? CountryWide? Bank of America? Merrill? They just needed more competitors to harness their “self interests”. You can’t look at what happened in the last few years and honestly believe that, can you?

  • http://www.pragcap.com Cullen Roche

    Really? You think there could have been a housing bubble if we eliminated all of those zero down no doc loans? If there had been no sub-prime borrowing? You seem to think it’s unreasonable to expect a bank to demand collateral for a loan that represents years worth of the borrower’s income. You say it impedes competition to have such rules. I say it’s common sense.

  • Wulfram

    We didn’t learn anything. The twenty percent limit is going to die as an orphaned bill in Congress this year. In addition, the Senate just passed a bill to raise the FHA conforming limit back to $730K. This is absolutely insane, since the limit was $417,000 back in 2006 and considering that even with a household income of $100k, a “non-jumbo” mortgage would still have a Debt-to-income ratio of over 7x.

    The government (and taxpayer) currently originates or insures 95% of the mortgage market at the moment. What a misallocation of resources.

    Ironically, one of the states that avoided the housing bubble and enjoys a fair amount of growth and low unemployment due to low property prices (and the subsequent low indebtedness of its population) has a law in its state constitution forbidding cash out mortgages. The state is named Texas. But don’t expect Rick Perry to say that out loud.

  • yibberat

    Spain didn’t have liar loans or such. they had a housing bubble. Why did California/Nevada have a housing bubble — and not Kansas or Kentucky? Are you all just uniquely greedy? Uniquely subprime?

    And where on Earth did you come up with me asserting that no-doc no-income no-job crappy-house no-downpayment nonsense originated in the market or among lenders? I said the exact opposite. It originated with government. Specifically a 1992 FRB Boston study – http://www.bos.frb.org/economic/wp/wp1992/wp92_7.pdf – that linked the then-current “high standards” to discrimination against minorities. With the recommendation – http://www.bos.frb.org/commdev/closing-the-gap/closingt.pdf – that those standards should be dropped. Which government then did — and with the sponsor of that study (richard syron – then head of FRB Boston) being one of those massively ramping up the securitization of that crap when he became head of Freddie Mac.

    The only reason those lowered lending standards (starting in the mid-1990’s and accelerating from there) seem so poorly linked with the post-2000 price explosion is because the price explosion itself was mainly a factor of excessively low interest rates (housing being one of those purchases that is made on the basis of monthly payments rather than total price).

    And yes — globalization – those Basel rules – were why banks in Germany, UK, France, etc bought that crap. And why the 2008 Fed bailout programs were so heavily tilted towards European banks.

    but hey — keep blaming “the greedy market” for this nonsense.

  • http://www.pragcap.com Cullen Roche

    I’m trying to have a rational discussion and give you a fair chance, but your insistence on being a smart ass is making that difficult. Can you not hold a conversation for 5 minutes without resorting to schoolyard tactics that distract from some of the goods points you’re making? Is that really so damn difficult for you?

    Spain had a similar situation to the USA where govt related entities were encouraged to make easy loans. They’re called Savings Banks (Cajas de Ahorro) in Spain. You might do more research on them as they were a primary contributing factor to the bubble. It takes two to borrow though. A greedy homeowner and a greedy bank. Did that reality ever cross your mind or are you too busy thinking of snide remarks?

    Why didn’t Texas have a housing bubble? Did it have anything to do with the stricter lending policies? No, it couldn’t have been that because that wouldn’t rhyme with your free market thinking. The data says otherwise. http://rortybomb.wordpress.com/2009/04/21/ban-mortgage-prepayment-penalties-at-the-federal-level-1-texas/ & http://www.jbgoodwin.com/news_articles/How%20Texas%20Escaped%20The%20Real%20Estate%20Crisis-Apr.%204,%202010.pdf

    I never said the govt did nothing wrong. In fact, I’ve been saying the exact opposite. But sure, if you want to go on believing that govt caused all of this and couldn’t have prevented any of it then be my guest. You and I both know a 20% down law would have prevented this entire catastrophe from happening because it would have eliminated most of the crappy loans that led to the banking collapse. If you can’t see the simple logic in that and instead prefer to filter this common sense through your politics, then perhaps you’re just better off spending more time at Mises.org where everyone will cheer you on as you blame the govt for all of our problems. Of course, that doesn’t fit into your anti govt mantra so you just shrug it off and move onto your next political talking point like you were taught to do by the high priests of Austrian econ or whatever far right wing economic school you pray before. And you talk down to me like I am to blame even though you aren’t remotely familiar with my overall position.

    I can see where this is going. You’re more interested in turning this into a schoolyard fight than trying to have a mature discussion. Enjoy that elsewhere. I am not entertaining it. For future reference, people might take you more seriously if you talk to them like an adult and not like some angry child. Until then, serious people will just shrug off your comments as nonsense. Let me know when you’re ready to act like an adult.

  • Texan

    I am a full time real estate investor in Texas. From my perspective, the number one reason we escaped most of the housing crisis was stricter lending policies.

    The small local banks in my town that kept loans on their books have all survived. They also didn’t stray very far from 20% down. Every time I ask my bank about current foreclosures I could invest in, they say “what foreclosures?”. One small bank did go under. It made loans that it sold off into the secondary market, and, of course, many were no-doc, low down loans.

    I don’t think 20% down should be law, but it should be policy that banks don’t stray far from.

  • http://www.pragcap.com Cullen Roche

    Texan,

    Thanks for chiming in. I am not necessarily in favor of the strict 20% down law either. But the example proves the point. If banks can’t lend to bad debtors then you substantially reduce the risk that anything like this can ever happen.

    Best,

    CR

  • Ben Wolf

    This is exactly why I can’t take Austrians seriously. They argue from broad principles, and when confronted with data which doesn’t conform they reject the data. Nothing can be allowed to conflict with their dogma, and it’s one of the prime reasons Robert Locke referred to libertarianism as the
    Marxism of the Right.

  • http://www.pragcap.com Cullen Roche

    My other conversation with John actually exposes another important fault in the Austrian thought process. They don’t even understand what fiat money really is. So their starting point is totally wrong. The IRS is the judge of what money is in my example on the other page. There’s no refuting that. John might think his car really is money, but the IRS doesn’t care what John thinks and he’ll do 20 year to life for questioning the IRS. He might not like that, but that’s the reality of a state issued fiat money. I didn’t build the system. I just help people understand it. John doesn’t understand it and ironically, has the concept of money entirely backwards. As do most Austrians.