Thursday, May 5, 2011

Oil prices and 9/11 and the Fed and Middle East revolutions

Joe Stiglitz made an argument on Rachel Maddow yesterday that I have trouble believing, but that is definitely worth investigating. From his book  The Three Trillion Dollar War, he seemed to have found that 9/11 implied the Iraq War that created a rise in oil prices, which caused an accomodative policy from the Fed which lower interest rates, then you can see in the video that he jumps to a relaxing of regulations(which seemed to have been caused, again, by the rise in oil prices), that led to the bubble, and well, the bubble popped. Then, Yves Smith points us to a Telegraph article arguing that the Fed accomodative policy was one important cause of the revolutions in the Middle East and North Africa, because it caused inflation in emerging markets, commodity prices rose and the increase in commodity prices was one factor of the revolutions.

There are a couple of things there, that I'll try to understand. First, Stiglitz's claim on the impact of the Iraq war on oil prices. I want to check that. Here is what he said to Ezra Klein two months ago:
Lots of things are always going on, but it was not coincidental that the price started going up very strongly after the war. And corroborating our view was that prior to the war, the futures markets had expected the price to remain around $23 a gallon.
One of the other things we argued in the book — remember, this was before the financial crisis — was that one of the reasons for our lax monetary policy, which we thought was distorting the economy and contributing to a bubble, was that purchasing power was being taken out of the economy to buy oil and the Federal Reserve had to compensate for that and it did it through looser monetary policy.

 Second, there is the explanation for the relaxing of regulations, which seems to come from the political world and not the Fed.

Third, there is the impact of Fed policy on commodity prices. My first belief was that the rise in commodity prices was due to a surge in demand from emerging economies, in particular the BRICS, and weather patterns causing supply disruptions (e.g. droughts in Russia and China).

Fourth, there is the link between high commodity prices and the revolutions. Once again, my first feeling is that commodity prices were more of an indirect cause of the revolutions, because they accentuated the saliency of the inequalities that had been rising in the last decade or so in some autocracies.

In any case, if you look at those two things by Stiglitz and Yves Smith, should we consider that Osama Bin Laden succeeded quite well in his objectives but also caused the revolutions that are making Al Qaeda irrelevant?

More on all of this later

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