September 10, 2007
One question that readers ask me often is why the mainstream media is doing such a poor job of reporting the nexus of the global energy emergency and the turmoil in global finance. I maintain my "allergy" to conspiracy theories. There isn't any clique of top-hatted Wall Street biggies with monocles joining with with gray-suited CIA-types to intimidate editors with tongs and electrodes. American culture has become self-dis-informing.
As my friend Peter Golden (blogger at Boardside) puts it so well: "When people lie, they know they are doing something wrong. But when they just make things up, there's no consciousness of right or wrong at work. It seems morally okay to live in a fantasy world -- and this is much more pernicious to the public discourse than lying."
My friends, who are mostly ex-hippie, yuppie progressives, have been locked in prayer to exorcise the evil spirit of George W. Bush for six years, but they fail to recognize a more comprehensive failure of leadership in every sector of American life, and especially in the ones where a lot ex-hippies-now-yuppies run things. Our political leadership may be deplorable, but so is our leadership in business, education, the arts, and especially the media.
The poster child for this is The New York Times. In their reporting on the world oil situation, they have consistently and uncritically swallowed the public relations handouts of Daniel Yergin's Cambridge Energy Research Group (CERA), a wholly-owned PR shop serving the oil industry. Laziness doesn't even explain this. It's bad editorial leadership. It's a failure to ask the important questions.
On Friday, the oil futures markets closed a dollar-and-change away from the all-time record high price (the same day the Dow Jones Industrial Index fell 250 points.) Today's (Monday's) lead headline in the NY Times Business Section is "Disney to Test Character Toys for Lead Paint." Well, I hope we get that situation straightened out so that civilization can continue with a full supply of Disney action figures under the Christmas trees -- and forget for a minute whether Grandma will be able to drive to the WalMart in December, or whether WalMart will be able to keep the diesel tanks filled for their "warehouse-on-wheels, or whether both Grandma and the Assistant Manager of her local WalMart are three months in arrears on their re-set mortgage payments, and maxed out on their Discover cards. . . .
To me, there seems to be an obvious correlation between the current failures in the financial markets -- in particular the credit sector -- and the gross failure of leadership across the board in American life. Ultimately, credit depends on legitimacy, and so does authority. They are tied together. For years, both have been immersed in fantasy rather than reality.
How does one otherwise account for the remarkable disappearance of standards in lending among the human beings who lead banking institutions? All the banking executives didn't wake up one morning missing sixty IQ points. And yet neither can one say that they all woke up one morning with evil intentions to work wickedness in the world. They simply became subsumed in a fantasy that there was no material difference between borrowers with a proven ability to pay back loans and borrowers with no record of credit-worthiness. And they got rid of the problems that might have ensued by selling off wholesale bundles of good-and-bad loans to willing buyers (other banking executives) further down the line, who in turn sold certificates representing these bundles to willing executives in pension groups and money markets. It became normal. It was justified at the tip-top of American leadership by the Explainer-in-Chief saying that it was a good thing for as many Americans as possible to own their own house.
Did the American media report on this chain of dangerous fantasy? Not in the least. They were simply mesmerized by the amazing, supernatural rise of nominal house prices, and the fantastic flow of paychecks from the production home-builder's payroll offices, and the fabulous cash-out re-fi's that sent streams of revenue to the Crate-and-Barrel furniture outlets, and the Williams-Sonoma catalog headquarters, and the plastic surgery parlors.
All this occurred against the background of what has come to be called Peak Oil, the turnaround point in global oil production, and indeed the all-time high-point of world oil consumption, which can be dated precisely now (in the rearview mirror) as having topped absolutely in July of 2006 -- the exact moment, incidentally, that a gigantic pin first pierced the outermost molecules of the soapy film that held the housing bubble together.
Oil production (all liquids, including natural gas byproducts, tar sands, what-have-you) are down now by more than a million barrels a day. We've only experienced it so far in the juddering rise of oil futures prices. Over this brief period of time since the absolute peak, the losses of supply have been yielded in the world's poorest societies, who simply drop out of bidding for oil supplies.
What the mainstream media is missing now is the prospect of a really swift worsening of the problem as exports from the major oil producing nations fall off at a sharper rate than their production declines. This idea has been articulated best by Dallas geologist Jeffrey Brown over at The Oil Drum.com (and for one particular discussion of it go to this blog at Jeff Vail's Energy Intelligence site).
The mainstream media is also failing to get the connection between the supreme commodity that allows the world's industrial economies to operate, and the credibility of a financial sector whose chief mission is to finance the operations of industrial economies. In the absence of any real prospect for growth in America's industrial economy, the financial sector dreamed up a system in which we could invest in the manufacture of investment instruments instead of productive activity per se. And so all the expertise and time of those working in the financial sector has gone into the production of tradable debt vehicles based on abstruse formulas that almost nobody could understand (especially the people buying and selling them).
All this dangerous fantasy gained legitimacy because for a while it seemed to pay off. Ordinary citizens could acquire houses much bigger and better-equipped than their incomes justified. And mortgage originators and bankers made whopping fees in enabling the action. And higher-up bankers in the chain derived un-heard-of bonuses from leveraging the securitized debt from all that, and politicians basked in the glow of a seeming hyper-prosperity, and professor Bob Bruegmann at the University of Illinois declared suburban sprawl a good thing, and even The New York Times, while staggering in news-gathering effectiveness against the Internet, was able to rake in enough advertising to build an unnecessary new headquarters skyscraper in Manhattan.
The dream is over now. Reality-based moral hazard is returning (literally) with a vengeance. Right and wrong are going to matter again and a lot of people who put these things aside for a while are going to suffer.
