Gasoline prices didn’t cause the housing crash

By Felix Salmon
March 8, 2012

It’s becoming something of a tradition for presidential candidates to (a) ritually attack high gasoline prices as being all manner of evil; and (b) suggest that there’s something the President can do to bring them down. Four years ago, both John McCain and Hillary Clinton supported the idiotic gas tax holiday; now, it’s Rick Santorum’s turn.

Calling for the United States to aggressively tap domestic energy sources, Rick Santorum said Monday that the nation’s economic crisis four years ago was caused by high gas prices.

“We went into a recession in 2008 because of gasoline prices. The bubble burst in housing because people couldn’t pay their mortgages because we’re looking at $4 a gallon gasoline,” he said. “And look at what happened: economic decline.”

This conjures up visions of the Santorum Strategy for economic growth: first, start blowing bubbles. Second, prevent anything which might possibly burst those bubbles from ever happening. Result: permanently bubblicious growth! What could possibly go wrong.

Any self-respecting economist, upon seeing this kind of logic, should and would run very far in the opposite direction. Unless, of course, that economist’s name is Steve Sexton. Santorum’s remarks “may sound far-fetched”, he writes, “but it is precisely the theory that I and a pair of coauthors presented in a working paper released five days before Santorum’s remarks.”

Oh dear.

Both the paper and Sexton’s blog post are titled “How High Gas Prices Triggered the Housing Crisis”, and both are very silly. Sexton actually articulates the Santorum Strategy in his blog post:

While the prevalence of risky loans made the housing market susceptible to collapse, had home prices kept rising in 2007, instead of turning down, rising home equity could have been used to renegotiate risky loans, thereby concealing and even resolving the market weaknesses.

Translation: if home prices had kept on going up in 2007 rather than going down, then we wouldn’t have had a housing-market crash. Thank you, Professor Sexton. That’s a bit like saying that if the price of technology stocks had kept on going up in 2000 rather than going down, we wouldn’t have had a stock-market crash. Sexton’s only venture away from banal tautology here is when he suggests that rising house prices could have “resolved” the weakness in the market — despite the fact that America in general, and California in particular, was full of subprime borrowers with no way of ever paying back the amounts they had borrowed. Extending the housing bubble for a year or two longer would only have perpetuated the Ponzi and made things even worse.

So even if it’s true that rising gas prices pricked the housing bubble and caused it to burst, we should be thankful that gas prices went up when they did: they saved us from an even more painful market crash a few months or years down the road.

But of course it’s profoundly silly to even try to identify the proximate cause of a bursting bubble. That’s what bubbles do, is burst. They all do it, sooner or later, for any reason or no reason. “Even the eminent bubble expert, the economist Robert Shiller, concedes we don’t know why the housing bubble burst when it did,” writes Sexton, as though this is evidence that Shiller just isn’t clever enough to have Sexton’s piercing insight about gas prices. In fact, what Shiller is saying isn’t really a concession at all: it’s an integral part of his thesis. You might be able to identify bubbles — Shiller certainly has a good track record on that front — but you can’t identify when or why they’re going to burst. Or, as John Maynard Keynes famously put it, “the market can remain irrational far longer than you or I can remain solvent”.

On some level, then, it doesn’t even make sense to say that bubble-bursts have a cause. For one thing, there’s absolutely no way to demonstrate causation, as opposed to simple chronological sequencing. And more generally, if a cause could be anything from rising gas prices to worries over Chinese drywall to a butterfly flapping its wings in Tokyo, trying to pin down a single cause is the ultimate fool’s errand.

But Sexton is a determined chap, and so he pulls out all manner of extremely odd arguments to buttress his thesis. For instance:

There is no doubt that subprime lending and speculation fueled demand for housing assets. But these are uniquely American phenomena. The housing boom and bust is not. A similarly volatile cycle was observed in Britain, Spain, France, and Ireland, among other countries that while not exposed to the aggressive lending in the U.S. would have been affected by global energy market dynamics.

In other words, you can’t blame subprime for the housing bust, since subprime happened only in America, but the housing bust was global. Since energy prices are global, on the other hand, they can explain the housing bust everywhere.

One big problem here, of course, is that if energy prices are global, then there’s really not anything the government can do about them, and the whole Santorum line of argument more or less falls apart. The second problem is that Sexton isn’t really talking about energy prices, he’s talking about gasoline prices. Which are something else entirely. Let’s look at gasoline prices in the UK, shall we?


As you can see, they’ve had a big run-up of late, but they hit a low point around the beginning of 2009.

Now, let’s have a look at the annual change in residential property prices in the UK:


The first thing to note here is that the big picture is pretty much the same in London as it is in England and Wales more generally. But London is pretty much immune from Sexton’s theory of property prices, which is that they fall when gasoline price hikes increase commuting costs. Londoners commute, but they don’t generally commute by car.

The second thing to note is that prices were rising until mid-2008, at which point they started falling, with the fastest rate of decrease coming in early 2009. Which happens to coincide with the low point of gasoline prices. The fall in UK house prices coincided with the big fall in UK petrol prices, not a rise.

Meanwhile, if Sexton’s blog post seems to have a weak grasp on the global, his paper errs far too much in the opposite direction, obsessing about house prices in California to the exclusion of just about everything else. Yes, prices in California suburbs fell a lot during the housing crash — and I daresay that an increase in the cost of commuting was part of the reason why. But that doesn’t mean that movement gasoline prices caused the national housing bubble to burst: it hardly, for instance, helps explain the price action of condos in Miami Beach.

All of which leaves just one big question: why on earth would a Berkeley economics professor publicly aligning himself with the primary-campaign rhetoric of Rick Santorum? I haven’t a clue on that one.


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