While "subsidization of risk and privatization of profit" is a consequence of the bailout, the justification is the stabilization of the credit market, making it so that people like me (by no means mega-wealthy) can get a mortgage on a small townhouse. To assume that the government took action in order to subsidize risk is to assume the consequent.

The government did not, years ago, say "Go ahead speculative hedge funds, go take risks on very shaky securitized sub-prime loans. We'll be here to bail you out if you need us." Rather, the Fed is responding to the ripple those bad investments are having across the economy.

I'm not weighing in on the wisdom of the Fed's cut in the discount rate; I'm not sure what the long and short-run effects will be. I'm just saying that the "subsidizing the risk and privatizing the profit" argument, while a fair (though incomplete) statement of what has happened, does not prove that the rate cut was bad policy, or demonstrate that there were other preferable alternatives to stem the sweeping financial effects.

Seems like some arm-chair economic theorizing to me.

It is arm-chair economic theorizing by definition.

No, the government did not make any promises to the hedge fund companies, but they also did very little to stem the subprime loan craze -- on the contrary, they encourage reckless home buying. If the government has programs to educate the public about what they eat, where they travel, and on how to stay safe in a natural disaster, why not more widespread programs to educate them on good financial practices?

Sounds like a good policy. No mortgage left behind. Golly, and if the government could make us all smart, beautiful, and rich, then we'd be in Utopia.

C'mon, I'm not saying that it would magically solve all problems, but don't you think it's in our country's long-term economic interest not to encourage reckless loans that lead to expensive bailouts and potential recessions?

I think it is in our country's best economic interest if the populace is educated about many things: mortgages, investing, credit-lending practices (including credit cards), civil rights, civil disobedience, literacy, preventative health care, math and science, foreign languages, inventing, singing, dancing, carpentry, puppetry, and the culinary arts, just to name a few. Long live the liberal arts!

But we can't seem to make government effectively educate the populace on math and science, on saving, on music and art appreciation, and on preventative health measures at the moment (god help them with puppetry and cooking classes); so I am skeptical that your proposed government program on mortgage lending is going to have effect. Though it would be great, it's not feasible. In the meantime, this is a harsh lesson to Americans either 1) financially unable to afford a house, or 2) buying beyond their incomes. It equally is a lesson to the credit markets.

Now, I don't recommend a darwinistic, "let the market sort itself out" policy when the effects of the sub-prime fallout are so wide-reaching. From what I can tell, consensus seems to be that the central banks needed to step in to reassure the financial markets. It was a reaction to a crisis, not a planned bailout of the mortgage lenders. Can we prevent this in the future? The tightening of the credit market is itself an indication that sub-prime loans are somewhat off the table.

Just to clarify, you said the government encouraged reckless home buying and reckless loans. How did they do this?

Take preventative health care for example, which the government spends a lot of money educating the public about (and not just schoolchildren). I would argue that the public actually is *very* knowledgeable about preventative health care, but that many choose not to practice it in their daily lives. Anyone probably can guess that the surgeon general and/or FDA recommends a certain amount of exercise, or to avoid smoking, or to avoid certain fatty foods, etc. But when it comes to economics, it seems to me that Americans are not even aware of the potential negative effects of their actions, regardless of their eventual decisions.

As to your question as to how the government encourages reckless home buying: there may be a more precise answer to this with respect to tax credits and official policies, but my feeling is that the encouragement comes from a much more subtle place. In particular, the government has decided to package home ownership (through speeches and politics) as an essential part of the American dream. I am also pretty sure the government offers several tax credits to first time home owners, which clearly indicates that the government promotes home ownership. While I am not saying that home ownership isn't something that people should aspire to, I am saying that the government should make clear that there is nothing wrong with the alternatives, both from an economic and environmental standpoint.

Though this may be semantic, I'm not sure it's accurate to say that the public is *very* knowledgeable about preventative health. Surely, many of us know that we eat unhealthy products and don't get the exercise we should, but do we know specific prescriptions for our individual physical health conditions?

I think the analogy to the mortgage problem seems apt: we know that we shouldn't spend or borrow beyond our means, but do we know the specifics of our mortgage/credit card contracts and individual financial health conditions?

If I'm right, then we are either very knowledgeable about both money and health, but choose not to act on it (which means that the government program for health education is no more effective than the general transmission of financial knowledge); or we are ignorant of both, and the government dollars spent on health ed were a tremendous waste.

I disagree with you insofar as I believe general financial knowledge, the rule of thumb, is ingrained in all of us (just like we all know we should eat more green veggies and fewer rare steaks). Yet we tend not to comply. Why?

With health, and I would argue with money, we suffer from over-optimism and under-assessment of risk. That goes for the educated and uneducated. More PSAs about getting exercise or saving pennies for a rainy day or triple reading financial contracts are unlikely to alter our behavior because of that over-optimism.

As for home buying and the American Dream: We The People are as much to blame for pushing home ownership as the government. That goes for We the People of Canada, Italy, Ireland, Mexico, Spain.... Home ownership is not exclusive to the American Dream. Perhaps owning a place is a more naturalistic urge.

As for the government's duty to "make clear that there is nothing wrong with the alternatives," I think there may be some sense in a tax credit for renters if there is a clear public benefit from renting (I have to think through the implications for school taxes). But the phrase I quoted sounds like the government needs to give renters a hug and tell them it is OK to be different. Reminds me of middle school.

You haven't proven the government encouraged *reckless* home buying (unless you think home buying is per se reckless from an environmental perspective), nor have you demonstrated the government's encouragement of *reckless* credit lending.

Geoff makes a few good observations, but what exactly is his point? He seems to be arguing for the sake of argumentation. The housing growth market is/was extremely reckless. The idea that every person who buys a shitty, fiberboard house will automatically see their investment double every three or four years indefinitely is absolutely insane. The fact that NINJA (no income, no job, no assets) loans were given to unknown millions of people on unknown millions of houses and will be coming due in the very near future is not only absolutely insane, but ought to be criminal (We don't even know how many of these bad loans exist, and where they were bundled, and sold in the hedge fund markets. These bad loans have made much of our "money" from the markets completely toxic). The fact that "finance" is the only thing keeping our economy afloat is absolutely insane. I will stop talking b/c I am not an economist, and am unable to list all of the reasons of why this is so fucked up. I recommend just reading James Howard Kustler's blog, Clusterfuck Nation.

http://www.scaryshit.blogspot.com

From this week's post:
"The Federal Reserve seems to be manufacturing an impressive supply of "greater fools" to go along with the dribs'n'drabs of credit that it is dropping into the sucking chest wound that the economy has become for the body politic. The Fed's idea, I suppose, is that if they lend a little money to the geniuses who engineered the latest (and probably last) bubble of the cheap oil age to cover their present losses, then the US economy will "right itself." What I think they don't get is that finance has virtually become the US economy -- if you subtract it, there is nothing left besides hair-styling, fried chicken, and colonoscopies. By "righting the economy" do people mean the ability to keep running a transparently fraudulent set of rackets that have nothing whatever to do with financing real productive activity?
By "greater fools" I mean, of course, buyers willing to step up and purchase securities that other people are shedding as if they were smallpox blankets. But even the Fed's supply of greater fools may prove insufficient when it becomes evident how much bad paper really is out there, and how it has been allowed to contaminate every tradable niche in the banking and investment house of horrors. I don't think we've begun to hear the disclosures."

PS-That $38 billion dollars could have been much better used bailing out the actual homeowners who will still be losing their homes, rather than bailing out a bunch of hedgefund managers who are going to declare bankruptcy in the Cayman Island's anyway. We essentially just dumped $38 billion dollars into a black hole. That could have paid for five months worth of Iraq, another black hole. There are only so many black holes we can keep dumping billions of dollars of money into before it impacts our completely fake economy. What's that quote? A billion here, a billion there, and pretty soon you're talking real money.

PPS-If you can get past TimesSelect, read this Krugman op-ed from earlier this week:
http://select.nytimes.com/gst/tsc.html?URI=http://select.nytimes.com/2007/08/17/opinion/17krugman.html&OQ=_rQ3D1Q26nQ3DTopQ252fOpinionQ252fEditorialsQ2520andQ2520OpQ252dEdQ252fOpQ252dEdQ252fColumnistsQ252fPaulQ2520Krugman&OP=7d129a1eQ2FQ27!Q60ZQ27nAPRRnQ27iNNdQ27NQ20Q27pdQ27R8VHVRHQ27pdgPMfk_HQ2FWnk2

Bail-outs = bad. Work-outs for homeowners = good.
The securities are garbage, no reason to throw good money after bad. The mortgages themselves are what matter. We shouldn't worry about the bullshit "finances" of the housing bubble explosion, we should be trying to figure out how to let people keep their houses and renegotiate their payments, not how to keep the hedgefund markets afloat for a few more weeks or months.

Yup, I like to argue. So do most of the people who read and comment on this blog, Matt. I think we do it to gain perspective, to gain insight, and most of all to keep in touch with a group of friends who, on the whole, know each other.

My first point was that the government action was a reaction, thereby clarifying that the money was not an intentional giveaway to the financial institutions, but an attempt to steady the credit markets. That is an important distinction. You seem to imply that the Fed monies went into the pockets of loan sharks and hedge fund managers. That is not the case.

Matt, if you are questioning my comments on recklessness, then I was trying to distinguish reckless lending from government encouraged reckless lending. Monk’s 9:41 posting accused the government of being not only complicit, but also active in a scheme that has damaged both the national economy and millions of individual homebuyers. That’s a strong accusation and one about which I wanted clarification. That was my point, nothing quite so grand as your non-economist’s sweeping (and I dare say, conspiracy theoryesque) indictments of the economy.

You and I are in agreement that buying a house—fiberboard or English Tudor—on the expectation of treble equity in three years is foolhardy. But I think we differ w/r/t this: “The fact that NINJA (no income, no job, no assets) loans were given to unknown millions of people on unknown millions of houses and will be coming due in the very near future is not only absolutely insane, but ought to be criminal.” Perhaps this is just carelessness in writing, but that statement means credit shouldn’t be given to low-income people. I very much disagree. Credit—when properly used—can be a way of reducing monthly costs and, when used for an appreciable asset like a home, can be an excellent wealth builder. I don’t know your financial situation, but I know I use my credit card; I have a mortgage; I qualify as a low income earner and I’m damn glad I have access to credit. Criminalizing low income lending would be a disaster, depriving low income folks from economic opportunities that could raise their net wealth. Are there risks? Of course. This is finance, not welfare.

Your post-script says that $38 billion would be better used to as direct assistance to sub-prime credit-unworthy homebuyers, rather than as a gift to hedge fund managers. Those $38 billion came in the form of a loan from the Fed to banks in order to fund the standard lending practices that had seized up in the wake of the sub-prime fears. The Dow had dropped more than 1,000 points in a month of extremely volatile trading; AAA credit requests were going unfilled because of the cash crunch; and hedge funds had announced that they weren’t going to honor requests by investors for withdrawals. In my opinion, not taking action would have lead to a much wider crisis, harming more than the sub-prime loan holders who shouldn’t have been taking out the loans in the first place. The securitized sub-prime loans are indeed bad; that’s why no one is buying them. The $38 billion was for the good stuff that wasn’t being traded out of uncertainty from the sub-prime fallout.

Kustler is “absolutely insane.” Read his stuff; it’s heavy on invective, low on facts and sources, but good for a laugh.

Oh, I guess it's KuNstler. Here's the Wikipedia entry:

http://en.wikipedia.org/wiki/James_Howard_Kunstler

I believe in legalized gambling, so I think it would be hypocritical of me to support regulation preventing low-income earners from receiving credit. However, I do think the government can, and should, take proactive action to provide such people with as clear information as possible as to the risks they're taking, just as lottery tickets are required by law to state the odds of winning on the ticket. For example, they could require lenders to attach a table of potential mortgage costs, depending on the market's fluctuations. Duly informed, the person could determine whether they want to take the risk or not. I do think the government has been complicit during the recent housing bubble, but it's more an error of omission and incompetence than a straightforward malicious act. Nevertheless, the bubble was benefiting the funders of those in power in many ways, so I doubt they had any short-term pressure to address the potential problem.

Geoff, I do see you point about the $38 billion going towards standard lending rather than the bad subprime loans, but that still doesn't change the fact that it's offsetting the consequences of bad business decisions on the part of the banks. Are you saying that there's nothing the government can do to try to prevent what has happened? Are you defending the $38 because you think it is the government's optimal path, or because it's the best they can do given the circumstances?

Credit to low-income people can be a good thing. Credit given to people who had absolutely no possible chance of repaying the loan is the issue. Many of these mortgage and lending companies were in the business of making the loan simply to get the closing costs, they didn't give a shit if the mortgage balloons from $1200 per month to $2800 per month in a few years. They just want their cheese from the sale right now, besides, they will just bundle the mortgage with a few million others, and sell it in the hedgefund markets. It's not like they have to deal with the consequences of foreclosure. That should be criminal in my humble opinion. As I mentioned before, we don't even know how many "bad" mortgages are floating around out there, and how many of these "bad" mortgages are polluting the rest of the financial market, floating around in hedgefund-land.

Quite frankly, I don't care that I sound like a conspiracy theorist. I have read Kunstler's books, not just his blog. One might disagree with his outlook for the future, but it is pretty hard to disagree with facts on the ground. We are running out of oil. We have an economy that is not really based on creating tangible stuff, but instead on moving money around through creative "finance". We are reaching the end of the tunnel of a cheap-credit fiesta, based on cheap-energy, and predicated on endless growth.

My ex-girlfriend's mother's business just went out of business last week. She was a wholesale mortgage broker. The bailout and restrictions on future lending, as Krugman says, are the equivalent of locking the barndoor after the horse is gone. Many of these creative lending institutions have gone or are going out of business as we speak.

I also apologize for sounding snotty before, Geoff. I'm just bitter at the world. I am also extremely depressed about the current situation. I am terrified that we are just going to paper-over the current crisis, and allow our current economic policies to simply stumble forward to whatever the next bubble is. Our economy has a bad tendency to create bubbles through the use of creative lending and finance (see housing bubble, tech bubble, and S&L crisis in just the last 20 years.) What's that they say bout systems theory? If the system continues to create the same result, maybe that is what the system was created to do?

How many more times can we keep the market structurally stable, when the underlying fundamentals are so weak?

I don't object to the table of mortgage costs. I have doubts that it will have much effect, but as I tried to say before, that is the product of human over-optimism and under-appreciation of risk. I definitely prefer a table of costs to criminalization of low income credit lending.

As for the government's "error of omission and incompetence," well, we have dramatically different perspectives on the role and abilities of government. Government doesn't see all and know all (unless you're Gonzo); it reacts to pressure by powerful influences. Point the finger at the credit lenders, by all means. But the government doesn't respond to financial crises in the making; it responds to the crises themselves.

Monk, like I said at the beginning of this exchange, I don't really know for sure whether the $38 billion was a good idea. Of course it is a reaction to the bad business decisions of banks. I will say that I don't know what the government realistically could have done to prevent it. Given that, there might be a case that the government's action was the optimal choice (given the circumstances).

I get snotty all the time, so no worries, Matt. I will say that Kunstler's and your description of the economy baffles me--particularly in the absence of any evidence. Given Kunstler's dooms-day track record, you'll forgive me my skepticism. Why--EXACTLY--are we on a house of cards?

PPPS-Since I have a dead-tree version of the Krugman piece I linked to earlier, I will write out a bit of a quote, this was the point I was trying to make about the workouts for borrowers rather than bailouts for the hedgefunds (I know I was being sloppy with my terminology, I know that the money technically "came in the form of a loan from the Fed to banks in order to fund the standard lending practices that had seized up in the wake of the sub-prime fears." but it still has the actual effect of keeping the current BS finance shell-game operational for the immediate future.)

Krugman:
"Consider a borrower who can't meet his or her mortgage payments and is facing foreclosure. In the past, as Gretchen Morgenson, a New York Times business reporter, recently pointed out, the bank that made the loan would often have been willing to offer a workout, modifying the loan's terms to make it affordable, because what the borrower was able to pay would be worth more to the bank than its incurring the costs of foreclosure and trying to resell the house.

Today, however, the mortgage broker who made the loan is usually, as Morgenson says, "the first link in a financial merry-go-round." The mortgage was bundled with others and sold to investment banks, who in turn sliced and diced the claims to produce artificial assets that Moody's or Standard & Poor's were willing to classify as AAA. And the result is that there's nobody to deal with.

This looks to me like a clear case for government intervention. There's a serious market failure, and fixing that failure could greatly help thousands, maybe hundreds of thousands, of Americans. The federal government shouldn't be providing bailouts, but should be helping to arrange workouts."

At the end of the day, is that $38 billion dollars going to stop one person from losing their house? No. We don't know how many people have "bad" mortgages that will come due in the very near future. I've heard 1 in 30 houses are already currently in foreclosure (who knows though. the government isn't keeping a centralized accounting of this). Marco is right, this is based on major governmental sins of omission, not necessarily commission. Lack of oversight and regulation at least tacitly led to this outcome. We are now proposing enormously wasteful, hugely expensive, stop-gap solutions that do not help the actual human beings who will soon lose their houses. I've just got to imagine there is a better way of spending $38 billion, and we aren't even addressing the underlying, structural problems with our economy.

I just want to point out that these "actual human beings who will soon lose their houses" voluntarily entered into transactions for financing that they could not afford. If I buy a Ferrari, the government will not come bail me out when i cannot make the payments. That goes for a Kia as well. I bristle at the thought of the government stepping in *in loco parentis* for adult voluntary actions.

Geoff,
If I may, I recommend this post at the Oil Drum, entitled "The Resurgence of Risk – A Primer on the Developing Credit Crunch":
http://canada.theoildrum.com/node/2871#comments

Can I first ask where comes the information on that Oil Drum blog?

"But the government doesn't respond to financial crises in the making; it responds to the crises themselves."

If you've ever read a speech by Alan Greenspan from when he was in office, you'd know that that's not true, at least in theory. The federal reserve can change interest rates and Congress can add regulation, among other actions, in order to prevent financial crises.

Fair enough, Monk.

Geoff,
Caveat emptor, I suppose. Stoneleigh, the author of the post I linked to is described on the Oil Drum "about us" page as http://www.theoildrum.com/special/about:
"Stoneleigh is an energy policy analyst and free-lance academic with a background in science, psychology and law and an abiding interest in economics."

I suppose that is the problem with writing under "nom-de-blogs," we cannot really assess the author's credentials. I would point to the quality of the research presented, and the fact that it is sourced (links to other news and research articles, as good blogs do).

As for Anonymous' points about bailing out Kia buyers, fine I agree too. I am just saying that if "we," the collective suckers that will eventually pay for the $38 billion dollars somehow, are in fact gong to spend $38 billion dollars bailing out a financial market based on BS, I'd rather spend the $38 billion dollars helping actual human beings who will be losing their houses. We shouldn't have spent the $38 billion from the beginning, however, we did already. Markets are supposed to be rational, right? That's what we are constantly told by economists and libertarians. So why did we just spend that much freakin' money, which in the long run, probably won't help in any real, tangible way? If we had at least offered $38 billion dollars worth of workouts for homeowners that can't make their mortgage payment, we see some sort of real world benefit; people get to keep their houses, that whole "American dream" thing, which is a good thing, no?

PPPPS-The link I posted goes to the comments at the Oil Drum. Here is a link to the actual post that I recommend that people read:
http://canada.theoildrum.com/node/2871

I thought the $38 billion was a loan. Anyone know the terms of the Fed's deal?

Slate's explainer to the rescue:

http://www.slate.com/id/2172342/

I just saw this on Drudge on foreclosure rates:
http://biz.yahoo.com/ap/070821/foreclosure_rates.html?.v=5

It looks like things are petering out a bit here. I just want to point to Matthew Yglesias, who says something fairly important in my opinion:

http://matthewyglesias.theatlantic.com/archives/2007/08/credit_and_class...

"Right. The trick is that given a collapse of this magnitude, it's all but inevitable that the public sector will do some bailing out. What one wants is, at the margin, for the largest possible portion of the bailing to go to people with the most objective need rather than the most political clout."

I might be a Kunstler-ian doom and gloomer for the long to medium term (what was it that Keynes said about the long term?). In the short term, I just want to make the point that if we are going to engage in bailouts, I'd prefer it go to the people who will actually lose their homes, not to prop-up an irrational, financial shell-game. I'd rather see the lenders punished.

As Posner says in the post CrazyMonk originally referred to:
"The punishment should fit the crime (I use "crime" in a figurative sense); the worse the crime, the heavier the optimal punishment, setting aside issues of detectability. If the government relieves risk takers of the consequences of their risks, there is a divergence between social and private risk. An example is subsidized flood insurance, which leads to excessive building in floodplains.

There seems a particular perversity in making credit cheaper, since cheap credit fed the boom. Lower interest rates encourage borrowing and hence spending and also increase the price of imports by making the dollar worth less relative to other currencies. Moreover, government intervention to help lenders and borrowers invites further government regulation--for example limits on subprime lending. There is no more reason to discourage risk taking than to bail out the risk takers when the risks they have voluntarily assumed materialize...

...It now seems that a number of hedge funds were caught up in a speculative frenzy, and that far from bringing about convergence between market and real values they enlarged the wedge between them.

Studies in cognitive and social psychology have identified deep causes for the overoptimism, wishful thinking, herd behavior, short memory, complacency, and naive extrapolation that generate speculative bubbles--and that require heavy doses of reality to hold in check. Any efforts to soften the blow will set the stage for future bubbles."

And from the post at the Oil Drum I mentioned earlier (which I seriously cannot recommend enough for a quick and dirty primer on the impending credit crunch and market flame-out); more available credit does not equal real money or specie. http://canada.theoildrum.com/node/2871

Also, as I mentioned before:
"What's that they say bout systems theory? If the system continues to create the same result, maybe that is what the system was created to do?"

Bubble, burst, bail-out. Shampoo, rinse, repeat.

Matt, I still think you've got it wrong. The $38 billion was not given to the credit lenders or hedge funds who faced bankruptcy. It was used to get the regular financial market back on track. Were the market to continue off the rails, the damage could have been much more widespread, making the current crisis look like picking daisies. As such, I think the Fed's action was more utilitarian than a direct action hand-out to the homeowners (yes, Anon, they shouldn't have signed the loans in the first place).

Geoff, I think we are unfortunately talking past each other. The "money" (more credit, bailout, whatever you want to call it) was used to get "the regular financial market back on track." That is a very important goal, if you believe that the regular financial market needs to get back on track, and that the regular financial market is somehow sustainable. I posit that it is not. We are talking about hallucinatory wealth, based on bad, bad, extremely bad mortgages. Mortgages (worth about $300 BILLION [as far as I can ascertain] in real money) that have been sliced and diced, and leveraged into TRILLIONS of dollars of manufactured wealth in the hedgefund market. The mortgages, which form the base at the bottom of this "inverted pyramid" of hallucinatory wealth, are failing. This can create what market/economic smart guys call "cascading failures." I agree that the damage could be much worse. In fact, I am sure that it will be. I guess we will just have to wait and see what happens. I hope to hell I am wrong.

One more link: http://www.marketoracle.co.uk/Article1493.html
"In short, as John Dizard notes in the Financial Times , "we are in a liquidation phase for subprime housing debt...Not ' the ' liquidation phase, because there will be several."

The liquidation of 2007's historic and global top in debt might also take a while to work itself out. "The complexity of this era of credit liquidation," as Robert Smitley wrote of the Great Depression in '30s America , "is far too great for the mob mind to grasp. It is hardly possible for them to see the picture wherein about $700 billion dollars of physical and intangible wealth is attempting to be turned into about $5 billion dollars of money."

How much intangible debt now needs to be squeezed back into how much real money? It would be easier to find a cheap mortgage – with no ugly ARM once the teaser is finished – than guess at those numbers today."

Was the Fed's response truly the best of a bad lot of possibilities? I don't know. I do know that the problem is systemic, and the current housing bubble is only an outward manifestation of deep, underlying, fundamental flaws in the American economy. You can't create real money. You can create credit and debt. Eventually, somebody has to pay for the credit and debt. It is hard as hell to pay for credit and debt when on a whole, your economy makes nothing of tangible value. As Kunstler says, it is all finance, "hair-styling, fried chicken, and colonoscopies." Show me where I am wrong on that one.

Our economy really is based on a few simple things, none of which can be described as very "productive": consumption, suburban sprawl, debt-spending, military-spending, government entitlement-spending, health-care, and leveraging the debt. That's about it.

The suburban sprawl component of the economy is dead. The debt-spending component is dying. The world has passed peak-oil, so let's see how easy it is to run an economy based on consumption when oil is over $100 per barrel. Let's see how long we can keep up the military and entitlement and health-care spending, when the dollar tumbles.

Sorry to be a party-pooper.

I am Stoneleigh and I wrote the article you were discussing above. Thank you for the kind words. You were curious about my credentials. I am not an economist, although I have been interested in economics and finance for a long time. I used to be a research fellow at Oxford specializing in energy studies. My current interest is in the interaction of financial bubbles and peak oil.

Very cool, Stoneleigh, thank you for weighing in. I mentioned the credentialing because I could already see where this thread was heading: "Oh, the Oil Drum is just some crazy conspiracy theory site, none of the authors even write for the Financial Times or anything."

"As Kunstler says, it is all finance, 'hair-styling, fried chicken, and colonoscopies.' Show me where I am wrong on that one."

Hamburgers?

Oh, how I wish I could get these kinds of conversations going at my place.

I just want to make one quick observation. I won't weigh in with anything more substantial because I have not read through all the comments. For that same reason, please forgive me if this is something someone has already said.

Geoff said [edited]:

The government did not say "Go ahead, take risks on very shaky sub-prime loans. We'll be here to bail you out."

It didn't have to. A combination of "too big to fail" and the existing record (e.g., the S&L bailout) would speak for itself.

how do you study peak oil and financial bubbles w/o being an economist?

I've been looking for a sector-by-sector breakdown of US GDP, without any luck. Does anyone have a clue? It might not be fried chicken, colonoscopies, and hair-styles, after all.

This was the best I could find.

http://usinfo.state.gov/products/pubs/economy-in-brief/page3.html

Um....yeah.

Replying to Anonymous above:

Being an economist is not a necessary pre-requisite for being able to learn and understand economic and financial thought, especially after being trained to acquire and process knowledge through many years in academia. My background is highly interdisciplinary, but I have been a keen student of markets for over 10 years.

I would also say that The Oil Drum is the absolute antithesis of a conspiracy theory site. The staff is very well qualified in a variety of fields and articles are well supported with evidence. We all work on a voluntary basis and are beholden to no one's agenda.

On the financial side, we have a former stock-broker and hedge fund manager, and a European investment banker specializing in renewable energy, in addition to myself.

If you are interested in the connection between peak oil and financial bubbles, you might enjoy this recent article by Stuart Staniford: US Peak Oil Adaptation: Prognosis in a Credit Crunch.

He addresses the financial aspects, and the implications for energy prices and investment, in the second half of the article.