Cascajun

Leo Linbeck III (aka L3) theorizes, via the Belmont Club, about the recent roller coaster ride the oil markets have taken.

Oil troubled waters 2

All of this goes back to the mortgage debacle, in which Jack and Jill went up the hill to fetch a big new home. Eased underwriting standards drove up home values (money flowing into housing faster than supply expanded); rising home values created phantom equity; phantom equity was converted by consumers into cash through additional debt; consumers spent that cash on stuff made overseas, driving down the value of the dollar and increasing global energy demand; the falling dollar and rising demand drove oil prices into the stratosphere.

Then Jack fell down and broke his crown, and Jill came tumbling after. Debt markets seized up; mortgage underwriting standards dramatically tightened; home prices fell as buyers left the market, unable to borrow on the same terms; existing mortgages went “under water”; mortgage equity withdrawals fell to zero (or negative); with no cash to spend, and lots of debt to pay off, demand for goods fell; falling demand led to falling production and the threat of deflation; the threat of global recession and deflation led to a financial flight to quality; the flight to quality led to a dramatic strengthening of the dollar; the strong dollar and falling demand led to plummeting energy prices.

It might be more satisfying to believe oil prices have been manipulated by the malevolent hand of Soros, Faisal, or Putin that pulls the puppet strings.

But it seems to me that the only hand manipulating all this is the invisible hand of Adam Smith, with the assistance of Frank, Dodd, and Raines.

And that, my friend, is the rest of the story.