Philip Pilkington interviews Thomas Palley regarding his book,
From Financial Crisis to Stagnation. Palley explains the economic ideas that contributed to the crisis of 2008 and mentions the role of the banks including Goldman Sachs. Oil speculation by Goldman Sachs is also noted.
From Financial Crisis to Stagnation: An Interview with Thomas Palley
By Philip Pilkington - Naked Capitalism
. . . .
PP: In the book you provide a very clear description
of what actually occurred in the financial market in 2008. Reading it I
thought that a lot of people – myself included – have never really put
the pieces together in their own minds. Maybe you could summarise the
key events briefly?
TP: The mechanics of the crisis within the U.S.
financial system are actually quite simple and can be understood as a
six step process. Step one was the build-up of toxic loans over several
years. Step two was when loans eventually started turning sour with the
bursting of the house price bubble in 2007, causing loan losses. Step
three was the destruction of bank equity caused by mounting loan losses.
This process began in the so-called “shadow banking system” and then
moved into the Wall Street investment banks and the established
commercial banking sector. Step four was the resulting threat of bank
defaults triggered by equity destruction. Step five was the rush to cash
spurred by the threat of default. That caused a liquidation trap as
agents tried to sell financial assets to raise cash, which deepened the
extent of asset price declines and caused further equity losses. Step
six was the run in the commercial paper market immediately after the
collapse of Lehman brothers (September 2008) whereby banks and financial
institutions became unwilling to lend to each other. That put every
bank (including Goldman Sachs) on the verge of default, prompting the
Federal Reserve to step in and de facto take over the commercial paper
market by acting as lender of last resort.
PP: In the book you mention the commodities bubble
that blew up in the 2008 financial crisis a number of times. Many
commodities – oil included – are nearly back at their 2008 levels. Do
you think that this could be due to speculation? If so, why on earth are
the US government allowing this?
TP: I firmly believe speculation is a significant
part of the run up in commodity prices, particularly oil. Over the last
decade there has been tremendous change in the character of commodity
market participants. In the past, the market consisted of producers,
end-users, and traders intermediating between these groups. Now, the
market has been invaded by financial investors in the form of pension
funds, endowment managers, hedge funds acting on behalf of high net
worth individuals, investment bank entities trading on their own
account, and exchange traded funds (ETFs) for ordinary punters who want
to speculate on commodities. This transformation represents the
‘financialization’ of commodity markets and it has resulted in a tsunami
of money chasing commodities as a speculative investment vehicle. After
causing a bubble and a bust in 2008, it has again pushed up oil prices.
The fingerprints of speculation are all over the oil market: large
one day price spikes and plunges that cannot possibly be explained by
changes in economic fundamentals; high prices in the face of large and
growing inventories; storage in unconventional forms like idle
super-tankers; and investment banks like Goldman Sachs purchasing oil
storage capacity in places like Cushing, Oklahoma.
Read the rest of the interview
here
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