The sequence of events in this recession

In response to a number of blogs, such as Econobrowser and Gjerstad and Smith's outline, I give my view:


We were still buying oil like crazy when oil peaked in mid 2008 but Gjerstad and Smith have the banking index declining in mid 2007 and the DOW peaked at mid 2007. Jim Hamilton is good at dating recessions, and he has the GDP dropping in mid 2008, with the oil peak. Unemployment starts to rise in mid 2007 but is still at 5.5% in mid-2008.

The Fed was responding to the fall in house prices when it began lowering rates in late 2007 even as oil prices continued to rise. The dollar hit its low in early 2008. Then came the crash.

The Fed lowered rates in response to the bankers panic about defaults, but ignored the other shoe, rising oil imports and rising prices for oil. The rise in oil prices accelerated as interest rates lowered until the consumer panicked.

Let's put some numbers behind this.

USA oil consumption is about 20 million barrels/day. Gjerstad and Smith put the housing bubble loss at 3 trillion, amoritized out at 5% interest rate, this is 150 billion/year. The $60 drop in oil prices come to 60*20 million * 365 or $438 billion/year. The loss in transportation sales is about 5 million units * $30,000/unit or $150 billion/year.

It appears that the consumer sacrificed much more in transportatio than housing.