STAFF NEWS & ANALYSIS
It Didn't Start Here
By - April 11, 2009

At the recent meeting of G-20 nations in London, officials from many nations agreed on one thing — that the United States is to blame for the world recession. President Obama agreed, speaking in Strasbourg of "the reckless speculation of bankers that has now fueled a global economic downturn." One problem with this blame-game is that last year's recession was much deeper in many European and Asian countries than it was in the United States. Like nearly every other recession of the postwar period, this one was triggered by a literally unbearable increase in the price of oil. Even if all of the weakest European and Asian economies could plausibly blame all their troubles on the relatively stronger US economy, how could anyone possibly blame banks? There were no bank failures last year in Japan, Sweden, Canada or any other country on this list except Britain. And US and British banks didn't fail until September-October — at least nine months after the Japanese and European recessions began. Yet it's clearly US/UK banks being fingered as the villains. German Finance Minister Peer Steinbrueck (pictured above left), for example, criticized an "Anglo-Saxon" attitude in America and Britain that encouraged risky lending and investment practices because of "an exaggerated fixation on returns." What did all the contracting economies have in common? Not all had housing booms — certainly not Canada, Japan, Sweden or the other countries at the bottom of the economic-growth list. What really triggered this recession should be obvious, since the same thing happened before every other postwar US recession save one (1960). In 1983, economist James Hamilton of the University of California at San Diego showed that "all but one of the US recessions since World War Two have been preceded, typically with a lag of around three-fourths of a year, by a dramatic increase in the price of crude petroleum." The years 1946 to 2007 saw 10 dramatic spikes in the price of oil — each of which was soon followed by recession. – Cato/NY Post

Dominant Social Theme: Don't blame banks.

Free-Market Analysis: The point of this article, while seemingly well-intentioned and clever, seems to us to swing wide of the mark. Sure, maybe oil was the proximate cause of what is turning into a worldwide depression, but is it the trigger that matters or the aftermath? The current economic situation seems to have gotten so bad so quickly because of the amount of mal-investment that was generated by central-banking mispricing of money. It is a pity that so many articles have come out blaming this regulation or that regulation for the crisis (and now rising oil prices), when in fact, the suddenness and deepness of the crisis can be explained in no other way, in our opinion, but by monetary mal-investment.

The regulatory angle is increasingly a favorite of Republicans in America – who find political fortune in blaming Democrats for various regulatory lapses that led to the current problems. Meanwhile, Europe and other regions of the world just plain blame America, or American banks, not differentiating between central banks and other kinds.

Certainly, bad regulation can distort economies and create national and even international havoc. But there are estimates that the world has lost upwards of 40 percent of its aggregate wealth in the past year. That cannot be ascribed to this regulation or that, or even the higher price of oil – for such a meltdown does not regularly occur. There cannot be but one explanation for such a massive wealth blow-off – the system itself is dysfunctional and modern money-stuff ephemeral.

When an economy is over-stimulated by paper money, the result is that resources find their way into unproductive avenues. It is not merely a theoretical concept. In this case, the bubble that was generalized found its way into the housing sector worldwide where it generated massive amounts of over-building. When the pullback finally came, not only was housing found to be mis-priced, but also the many individuals who had spent time and money training for jobs related to building, or created whole businesses around building were suddenly out-of-the-money. It rippled throughout the global economy.

After Thoughts

Is it important to pin the trigger for the current economic situation on an oil-price shock? No matter the shock, the current economic downturn is obviously different, and, really, can only be explained by massive fiat-money mal-investment. Prestigious Libertarian organizations ought to be in the forefront of exploring this most important conversation.

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