Something That’s Been Nagging Me…

The Brookings Institution has been theorizing recently that the cause of the crisis wasn’t just the tightening housing markets, but that the oil shocks of the summer of 2008 were the primary catalyst. Way back in 2003, James Hamilton had theororized what an oil price spike like the one we experienced would do to the GDP. What he had predicted (and it makes a certain amount of sense) is a sharp downturn in the GDP, not unlike our current one.

As he points out, housing prices had been in somewhat of a decline since 2006, but that homeowners homeowners and banks were mostly handling the decline. Then the oil shock came, and homeowners who were cutting costs and managing their declining home value suddenly found they couldn’t afford a doubling in the gas prices, defaulted on their mortgages at once, leading to the sharp crash in the financial sector of the economy.

The Wall Street Journal appears to agree, and really the whole thing makes an awful lot of sense.

What worries me is the kind of demographic changes a recession incurs. Many people become unemployed and stay unemployed, but many more people lose their jobs and find something else. Your natural reaction to losing your job would be to look for another one in your same area isn’t it? The problem is that in most cases, and especially in a recession, it’s impossibly to get a job closer to home and for equal pay. So, we may start economically recovering with a number of homeowners, again, on the verge of not being able to pay their mortgages. The economy recovers, oil prices recover, and a whole new class of people get shocked into default on their homes.

Am I the only one here who sees the potential for a very dangerous spiral?

-Marc-