Part 2 - The falsely accused There has been much comment on the effect of new financial instruments, such as collateralised debt obligations (‘CDOs’). These CDOs and other similar structures allowed the banks to ‘securitise’ their lending and sell loans to other so that they could redeploy their capital to do yet more lending. This had two effects. The first is that it led to a structural shift upwards in the supply of mortgages and other loans. The second effect was to separate the origination of the loan from the ongoing risk. Banks became less concerned about checking the creditworthiness of their customers, because they would be holding the bulk of the loans for a short period of time. We do not know the quantum of this effect, though basic economics teaches us that a shift in the supply curve should lead to an equilibrium point of lower interest rate margins and higher quantity of lending. We must not mistake a manifestation of a problem with the underlying cause. Al ...

Part 1 - The Role of the Central Bank The disappointing reality is that blame is widely dispersed, which is the very nature of the mass self-delusion characterising all booms. Governments of (some) developed economies are to blame for expansionary fiscal policies when economies were already growing too fast. Asian governments are responsible for pursuing mercantilist policies which led to the accumulation of western currencies and their reinvestment back into bond markets. Bankers are foolish for having lent money to people and corporations who should never have borrowed it in the first place. Individuals are just as foolish for having run up debts which they could not afford to repay without the support of rising asset prices. Even television companies are to be criticised for their output of programmes which contributed to the general view of houses as financial assets and sources of profit generation. Hedge funds are to be blamed for borrowing too much money and becoming lazy by s ...

‘Energy security’ is both a popular and a misleading phrase. It implies a defensive and hostile environment in which countries compete tooth and nail for the earth’s dwindling resources. But in reality the global energy infrastructure is founded on close political and economic ties based on agreements both with the oil and gas producers but also between fellow consumers. It is a delicate balance, and one that is periodically upset by pipeline disputes. The most recent one between Ukraine and Russia resulted in the closure of a vital pipeline leaving thousands across Europe and Turkey without heat or electricity. For a brief moment at least, some of Europe’s major powers became aware of a complete reliance on their impoverished neighbours for their energy supply. The question then for Europe’s richest states is how best to avoid a repeat performance. Policy responses have varied greatly. Germany has agreed a controversial new pipeline, Nordstream, which links Siberian gas res ...

"Where there is oil, there will be blood" wrote Upton Sinclair in his novel Oil; but increasingly forecasters in the energy industry are pointing to the gathering storm clouds as oil dries up and raises a host of questions for energy security. The International Energy Agency predicts an oil supply crisis by 2013; Shell has seen fit to revise that figure upwards, but only to 2015. This year Chevron is expected to announce the largest losses in a decade when it publishes its annual profits in May. Meanwhile OPEC countries are seen to be withholding supply beyond cuts determined by the group in September of last year in an effort to boost the oil’s flagging price. And the price itself, having somersaulted from $147 in June last year to the bottom of the proverbial barrel in late 2008, has seen a typically volatile commodity surpass itself in its movements. Enter "peak oil". Peak oil is, quite simply, the point at which oil reserves being used up are no longer matched ...

Tim Harford is an economist, broadcaster, and the best-selling author of 'The Undercover Economist' and 'The Logic of Life'. The Alligator 's Mike Webb caught up with him to talk about his work, the economics of speed dating, and why economists definitely shouldn't run the country. ...

If a day is a long time in politics, then a decade is certainly a long term in the automotive industry. Ten years ago if someone had predicted that Fiat would be a global powerhouse they would have been laughed out of the room. Giovanni Agnelli, patriarch of the family firm, famously summed up the company:“I fear that Fiat is too big for Italy, and too small for the world.” The arrogance of Fiat’s then management believed that Italians would always buy Fiats and relied on national pride as a means of making profits. Silvio Berlusconi, like many of those before him, encouraged the cavalier attitude with protectionist measures and romantic statements - “Many of us Italian men kissed our first girl in a Fiat 500, Fiat is in all our hearts.” Saddled with debt, and after successive failing models, General Motors (at that time the world’s number one automaker) paid $2bn in 2005 just to avoid buying Fiat’s car making business, after holding a 20% minority stake since 2000. Now ...