Jim Kunstler on the Bail Out and What’s Next

Jim Kunstler, author of The Long Emergency, has been predicting today’s financial catastrophe for a few years now so it’s no surprise that his blog is loading slowly this morning. The people want to know: What’s going to happen next?

What the
mainstream is truly missing here en masse is that another tsunami is
building right behind the finance fiasco, and that it will render moot
the whole reeking cargo of schemes and wishes that comprises the Great
Bail-out. I am speaking of the global oil problem. In fact, the
problems in banking and money currently roaring in the center ring of
the world circus, can be described categorically as a product of the
oil problem — since oil is the primary resource of industrial
economies and therefore the motive force behind our ability to generate
"wealth." Without reliable and ever-growing supplies of oil, there is
no industrial growth, and without industrial growth things like capital
investment instruments lose their legitimacy. That is why the
Frankenstein family of Ponzi securities was invented in the first place
— to compensate for the demise of industrial growth by creating wealth
out of… nothing!

  • Peak oil is definitely the unacknowledged gorilla in the room. And that’s as true in discussions of the livable-streets movement as it is in discussions of the economy. Right now oil prices have backed off, providing a moment to relax, but due to geological realities beyond our control, they’ll soon be ratcheting up again. Drivers won’t be the only ones to suffer. If you want to redesign the street — not just with paint, but with concrete and asphalt and bollards — you need heavy machinery and diesel. Not to mention lots of public money. So the livable-streets movement needs to translate its wish list into reality as soon as possible. In another few years, making major physical changes in our environment may be impossible.

  • Shemp

    Peak oil or not, Kunstler’s screed linking the credit crisis to oil has no rationale. A bad loan is a bad loan. This just makes him look even more histrionic than usual.

  • Marty Barfowitz

    I disagree, Shemp. I know that we like to refer to these bad loans as “paper,” but what was all of that toxic paper anyway? Mortgages. For homes. Many of these homes were ex-uburban McMansions in places like Stockton, California. These homes began plummeting in value and these mortgages started defaulting at exactly the same time that gasoline began ratcheting up past $3.50/gallon. There is a direct connection between the price of oil, the collapse of suburban home values and the current financial crisis.

  • Shemp

    Mortgages, for homes, that many, many people could not fundamentally afford. A home value going down doesn’t affect the ability of the owner to pay the mortgage, unless they’re in the real-estate-flipping business to begin with. Home values started going down because the prices had risen beyond reason – in part because of super-loose credit. Agreed that places that are more transportation-efficient have retained more value in the face of rising transportation costs but that’s very secondary here. You guys who want to reduce everything in the world to your own primary preoccupation will end up only talking to yourselves.

  • rlb

    It’s true that those were bad loans. But the bigger problem was that once the owners defaulted, there was nobody there to buy the house again. If you think that the demand and hence the value of defaulted exurban homes are likely to continue to decline as oil prices rise, then the link between peak oil and the continuation of the financial crisis is very real.

  • There were speculative bubbles long before anyone heard of peak oil: the stock market bubble of the 1920s that led to the Depression was just the worst of many.

    It is a financial problem: excessive optimism (stocks will always go up or real estate will always go up) convinces people to take shaky loans to buy things they can’t afford, since they believe that future increases in value will save them. When people begin to realize that it has gone to far, they begin to sell. As a result, values stop going up and other people who counted on the rising values are forced to sell, and values crash.

    Higher prices of oil undoubtedly contributed to the loss of confidence this time, but there would have been a crash anyway – maybe just a bit later.

    But oil prices will keep going up, and they will cause another set of economic problems even after the housing market settles down. Those economic problems will be based on real-world shortages, not on financial manipulation, and so we will not be able to cure them with financial bailouts.

  • James

    Lately, Kunstler has been right way more than he’s been wrong. Though I’m a frequent reader of his, his diagnoses often tend to be less than helpful because frankly, if you take what he says to heart than you’ll go wall yourself off in a compound in the mountains to avoid the inevitable “Mad Max” scenario that oil scarcity will cause. It’s paralysis-inducing.

  • Mikko

    His premise that industrial growth always requires growing oil inputs is simply not true. Lots of industries have figured out how to make more from the same input, i.e. their productivity has improved, sometimes dramatically. Industrialists are not dumb SUV drivers, they actually do very careful energy efficiency calculations.

    Kunstler is at his best when writing about urban planning and design. He is no expert on economy and spews some truly repulsive stuff about US foreign policy.

    He seems to have totally written off any kind of technological alternatives to the current transportation fuels. The development of the alternatives is running late and the transition will be painful, but the scientists and engineers may surprise him yet. I think he is right in that the current volume of motoring will not be run on ethanol and certainly not hydrogen, but it may well turn out to be possible to run a smaller number of more efficient vehicles, some of them battery powered, some with some biomass-based fuel. Trains and bicycles will take their share.

    Kunstler’s vision seems to be that either everyone must learn to live like the amish or else we’ll have a Mad Max -style dystopia. The knowledge of modern technology does not just disappear because oil gets expensive, and I’d argue that the development of the alternatives to cars with internal combustion engines has only just begun.

  • lee.watkins

    The financial crisis resulted from massive over-leveraging of securities backed by Mortgages. Even a slight reduction in the rate of growth would have popped this bubble because of the 40 to 1 leveraging ratio.

    We can prove that Kunstler is correct because when gas prices spiked to $4.00+ the rate that the value of a given home began to drop was directly proportional to that home’s distance from the nearest major city center. I recall the Washington Post even created a map of this produced by Zilllow.com’s data sets. This caused gridlock in finance because all the new McMansions are being built in cornfields, far from the city – it was more than enough to set off a chain reaction in the Ponzi securities.

    Bailout or no bailout, it won’t change the fact that until we transition our economy to one that is less energy intensive the triangle of finance, insurance, and real-estate will remain a perpetual powderkeg, with the price and availability of oil&gas being the fuse to light it. Unfortunately the USA is at the end of the worldwide supply chain for oil & gas distribution, and exporting nations will most certainly nationalize the remaining resources for their own growth, leaving little to spare.

    Realistically the only option for the USA is to build out nuclear and the remaining coal reserves, as well as all the wind and solar, and wave power we can manage to harvest, but even this will only power a fraction of our current energy consumption. That is why we must transition to a way of life that requires less energy. That means electrified railroad networks, bicycles, and dense cities surrounded by farmland. The framework of highways and suburban development is useless when oil & gas is expensive for the middle class, and this is a powderkeg that will perpetually explode in the form of finance schemes that can no longer be sustained – as well as the more mundane but painful experiences of everyday middle-class problems.

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