Opinion: How the US sub-prime financiers created so much mayhem

Opinion: How the US sub-prime financiers created so much mayhem

 Neville BennettBy Neville Bennett

I have been writing about the US housing problem on this website since 2006. I was incredulous that anyone would issue sub-prime.

Since then it has been a disaster that has dragged the world towards the abyss.

It is far from over, as new housing starts last month were the lowest since 1963 when records began.

While the situation merits despair, some black comedy has emerged. Two episodes are worth a look.

The new house bonus scam

The Federal government has promoted several schemes to encourage the building of new homes. Accordingly there are bonuses of about US$8,000 available to the purchasers of new homes.

An investigation has found that 19,300 people received the bonus without the hassle of actually buying a house.

Some were rather precocious: 580 were below the age of 18, including a 4-year old. I am surprised by the lack of enterprising pets.

The new leisure class, the prison population took a great interest: 1,295 claimed to have bought a house while they were incarcerated. Some were especially optimistic, 241 prisoners were on life sentences successfully applied for a bonus without buying a house.

The authorities are disturbed to discover 87 Internal Revenue Service employees fraudulently claimed the benefit.

These frauds cost the taxpayer $30 million.

The program seemed to make the housing market more volatile. It did stimulate some construction but when the subsidy ended, construction seized up to its lowest level in 50 years.

The market is likely to remain dull as some potential buyers will hold off in the expectation that President  Obama will renew the subsidy.

Some analysts argue that all subsidies are bad, but the evidence is mixed.

The subsidy available to people who traded “clunkers” for new cars appeared to kept the American auto industry alive at a time of plunging consumer confidence.

That program threw a lifeline to millions of people in the car factories, and those who turned raw materials into parts. It helped to keep the economy alive and helped some people retain jobs while millions were losing them.

The effects of the “clunker’ scheme were good but I have not seen a cost benefit analysis. Nor have I heard of the externalities of corruption.

But there is always a cost, especially adding to the national debt.

Given a choice, I would opt for job creation schemes rather than the bailout of banks. Some Keynsian pump-priming has merit in a recession.

Please, please sell me more toxic assets: I cannot get enough of them!

Imagine that you are a huge, respected mortgage company doing a good job in housing millions of Americans. Then you notice that other mortgage companies are registering profit margins substantially higher than yours. You do not really need to compete as your superb credit rating practically guarantees as much funding as you need.

But hey! We live in a competitive society, so of course we will compete. So you buy (toxic) securitized sub-prime.

This increases nominal profitability. Fine! Then you start worrying: can you guarantee supply. That’s a reasonable worry: every business takes care to ensure a good supply chain. How far do you go?

Read on for a case study in stupidity involving the biggest mortgage holder, the Federal National Mortgage Assocation (FNMA) or Fannie Mae, and Countywide (CHL) who was the biggest supplier of subprime - and is now defunct.

Fannie Mae was desperate to get securitised loans from Countrywide to increase the size of it loan book. In 2007 it bought 28% of its loans from Countrywide.

The New York Times has recovered an internal Fannie Mae document from 2004 called a 'customer engagement plan' by which Fannie employees were to keep sweet Countrywide’s boss, Mr Angelo Mozilo, the CEO and 14 of his top staff.

The document is redolent with MBA language: "Deepen relationship at all levels throughout CHL and Fannie Mae to foster alignment and collaboration … at every opportunity”. Staff were encouraged to mingle with Countrywide’s top managers.

It stressed opportunities at up-coming conferences. It wanted “deep rapport” with CHL president David Sambol which was difficult as he did not go the conferences.

Staff should visit CHL headquarters on any excuse to seek “opportunities for meetings ... to foster ongoing communication channels that allow us to understand and leverage Sambol’s priorities and demonstrate our commitment to make his successful”.

I do not know what happened to Mr. Sambol but Mr Mozilo is in prison.

Mozilo is a key figure in the meltdown of the world financial system. He has cost taxpayers worldwide a fortune.

He was a butcher’s son who became extremely wealthy with a string on mansions and gold-coloured Rolls Royce cars. He built a US$200 billion company from scratch, and used subprime to generate revenue of US$8 bln in 2004.

Mozilo was charged by the US Securities and Exchange Commission with insider trading: when at the helm of Countrywide he made $140 million by selling CHL stock, while getting $82 million in performance pay in the period 2005 to 2008. His email admitted subprime was toxic when economic conditions inevitably turned - he understood what he was peddling. 

Countrywide collapsed in 2008 and major parts were absorbed by Bank of America.


* Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR.


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Great Neville

Great post as usual. Please contribute more often.

Try your own backyard for stupidity neville.....


" The Welcome Home Loan limit has been extended for first home buyers in higher priced areas of New Zealand and those wanting to build houses on multiple-owned Māori land.

 The amount that can be borrowed under the Crown-funded mortgage insurance scheme has been increased from $280,000 to $350,000 for first home buyers living in higher-priced areas.

 From 1 July 2009 to 30 April 2010, a total of 1528 Welcome Home Loans have been settled, which translates into access to home finance of $320 million for almost 2500 New Zealanders"

That's 1528 who paid price bloated sums to keep the bubble intact and save the bank profits!

Neville Bennett says: "The effects of the “clunker’ scheme were good but I have not seen a cost benefit analysis."

How many buyers of these cars intended to purchase a new car anyway prior to the subsidy being announced?  As a result they were given free taxpayer money for something they would already have done.  When will people learn that all Gov't subsidies are a waste of money.

The underlying problem with sub-prime, was the widespread belief that property prices can indefinitely rise faster than home "owners" can rack up unpaid mortgage interest. Why do we think we can sneer at the yanks, when this belief is as good as widespread in this part of the world too, even if we kid ourselves that we haven't got a "subprime" problem. Look at that Infometrics "expert" commenting the other day - just a temporary lull, and property prices can resume their 10% per annum rise in 2012. DUH? Furthermore, the connection between these insane speculative bubbles and urban planning processes meant that about 75% of the USA didn't even have a bubble at all. Half the losses have been suffered in California alone. What I am asking again and again, is how much worse might a housing crash be in a country that did not have ANY zones of sanity? But Neville is completely right to point up the role of stupid government intervention in the property market. At least our government hasn't done what the Rudd mob did with a special first home buyers grant - it drove prices up 20% in weeks and left most of the first home buyers who used the scheme around $100,000 WORSE off than if they had bought BEFORE the grant was introduced. (The problem has to be all on the "supply" side of the market, when this sort of thing happens). I actually think the one worst government interference in the USA, that has made their crashes so much more volatile than anyone else's, is the law that a mortgagor cannot be bankrupted; the mortgagee can only take the HOUSE as security, and has to swallow all negative equity. Of course people just walk away from their homes and mortgages en masse. The leftwing chorus about "failure of free markets" is just sickening ignorance.

Neville- 30 million is a margin of error, not a driver.

You have  a point about cash-for-clunkers, but you have to realise that all Pollies nowadays have been brainwashed with the need to keep on with growth of consumption. Advised by those who are insistent that growth is limitless, even if they felt some unease, they assumed/hoped a resumption would do the underwriting,

And inevitably overshot.

You are quite right, taxpayers took on the private/corporate debt - a shifting of 'wealth' that has been going on since the '80's. It's not the big problem though.

Some of us are looking further ahead and you - given your history - should be familiar with the 'limits to growth'.

Further, we assumed that the limits would be reached when energy supply rates (not by volume but by actual kw available) reached it's effective peak, minus efficiencies.

Obviously that is simplistic - existing infrastructure (representing embedded energy) can be utilised beyond 'expected lifetime', which staves off the problem for a while - rather like not painting the house for 20 years. That's a problem increasingly going to bite us in the bum. Moores Law (the optimists panacea - runs into the law of diminishing returns - clock speeds vs heat dissipation vs molecular crosstalk for instance.

Nonetheless, most economists, lobbyists and pollies can't see life without exponential growth, and to expect them to put the brakes on (intervention in the market? Never!)

So they let it happen. If it wasn't the sub-prime, it would have been something similar. There will be pressure for more too. Canty irrigation, coast-to-coast aquaculture (an energy issue too - do these idiots realise that this is an attempt to remove energy from the food-chain? It's as naieve as grazing without fertiliser - lunches are not free) 'infrastructure investment' (mostly last-century things like motorways) it will go on.

From peak energy flows (minus efficiencies) onwards, the ability to 'grow' by investment progressively becomes hamstrung. 3% global growth p.a. requires a doubling in energy, minus efficiencies, within 24 years. I wouldn't be putting money on that - which is effectively what everyone wanted/still wants to do....

The debt may change hands and form, but from here on it exists. Bollard epitomises the 'wrongness of thought'  to me -  he talked of the dollars lost stretching from somewhere to breakfast time. I say they never existed - levered numbers on wished-for 'valuations'. That includes all that hedge-fund 'money' looking to expand it's buying power in a trending-to-zero-sum game. It's not my field of expertise, but maybe the lack of drivers for growth will show up as zero, then negative, interest rates. It certainly looks as if the Fed is heading there.

In my circles, we say 'the penny will drop', and we mean it both ways.

Welcome to the long emergency. I've stopped blaming (although I keep note), because the window to adapt to the new paradigm is closing, and all energies (ha) should be channeled in that direction.

The best historian to look to homeworkwise, is Jared Diamond.


I do appreciate your opinions and analysis here and in the NBR too. Thanks for the nod, and the tip about Braudel. He is on my "to read" list. I have imbibed some of his work via third parties.

I recommend Colin Clark's "Population Growth and Land Use" to those who are interested in the historical background on this. Still a very dry read but briefer than Braudel.

Incidentally, Paul Callaghan in "From Wool to Weta", quotes Diamond on the "30% forest cover" point, and points out that we are about right.

I am finding geographic economics to yield new insights that connect with all this. For example, how much of NZ's primary produce exports have actually represented a net loss to the economy when transport infrastructure costs are taken into account? Clearly large net losses were incurred in the pre-Rogernomics era of direct subsidies. I am now having second thoughts about the cost of INDIRECT subsidies for what are essentially bulky, low value, low-income-job-creating products.

Excuse me coming back again. I suddenly "got it" about Braudel. I see his point (one of his most important) about "Capitalism" tending to subvert "free markets" to the advantage of the individual "capitalists". I am not sure if Braudel was ever optimistic about the ability of true free markets to remain unsubverted. I would point to the genuinely free markets in land and urban development in Texas in particular, but in much of the USA, as evidence that genuine free markets where "capitalists" are forced to work "for" the benefit of the customer, as Adam Smith envisaged, can exist. Housing developers provide housing so low-cost that it is almost pointless trying DIY to save money.

Ian Abley of "AudaCity" in England, is a bit of an anarchist-socialist, and insists that the only answer to the unaffordable housing problem is to grant the individual "freedom to build" on any land that he can legally buy, includng cheap agricultural lan. He really has no answer for my point that when there is "freedom to build" for everyone, including the capitalist as well as the individual, the end result is that the capitalist is forced to serve the customer's interests so efficiently that hardly anyone needs to exercise their OWN "freedom to build". I am discovering, with interest, that there is a definite role of "culture" in all this, and contrary to what Braudel surmised, a particular type of Protestanism is the key here.

None other than the IMF, recently published a working paper by Christopher W. Crowe, entitled "Irrational Exuberance in the Housing Market: Were Evangelicals Left Behind"? A strong NEGATIVE correlation is found between the proportion of Christian evangelicals in the population, and "speculative behaviour" driving housing bubbles. But what Crowe misses, is that there is ALSO a strong correlation between evangelicals in the population and a LOW level of regulations of all kinds. Refer: Dennis P. Hollinger: "Individualism and Social Ethics: An Evangelical Syncretism".

Generally, Christian fundamentalists/evangelicals regard the environment as God's provenance for man, and their influence would undoubtedly be in the direction of relaxed urban growth boundaries. This would prevent bubbles from occurring even apart from the surmise that these Christians would be less inclined to behave speculatively. This connection would be a much stronger explanation in any case, as the speculative behavior of the "other" majority groups in the population would tend to drive any bubble anyway.

Lastly, as a bit of a counter to Powerdownkiwi's (and Jared Diamond's) pessimism, if you have never read "Environmentalism Refuted" by George Reisman, it is essential to any rational, scholarly consideration of the "sustainability" issue.

What I always ask when someone is commenting on a phenomenon that is occurring in "the USA", is "where in the USA"?

In areas where there is little or no restriction on new housing development, it has continuously been possible to buy new houses for $120,000, cross-leases or townhouses for $85,000 NEW, and older, run-down houses for $40,000.

In parts of the USA like California, where there are "smart growth" (newspeak translation: dumb strangulation) policies, and in NZ, those prices are roughly $500,000, $400,000, and $300,000 respectively.

Politicians in the USA have for nearly 20 years been encouraging "home ownership" through arbitrary mandates on the mortgage lending institutions, and through sponsorship of Fannie Mae and Freddie Mac. Of course the need for provision of "public housing" has been seen to be reduced meanwhile. "Subprime" had some origins in this interference. The REAL damage has occurred to their economy because of "subprime" criteria being extended proportionally to ridiculously overpriced properties in "smart growth" areas.

Yes, there were lots of $40,000 subprime mortgages in Atlanta taken out by solo mumns. But there were many, many more $1,000,000 subprime mortgages taken out by $150,000 per annum combined income yuppie couples in California.

In parts of California, it has been reported on some blogs that banks are even letting some people live in reposessed homes for nothing - because they keep the squatters and the vandals out.

Damn good to have a top academic of such experience as Nev who puts things in such plain english...and common sense.

Jim "Hide the Decline" Salinger....????????

Japan is indeed worth thinking about, using ex-territorial resources for both consumption, and for processing/export.

Needs a parallel study of the supplying nations, of course.

Jeffery Brown has developed what he terms his 'Export Land Model' tracking the trend where an exporter consumes more local resources internally, thus switching to being an importer.

Everyone can't do that.

Here - rightly - Japan is mentioned as a yardstick for where we will inevitably go - not a doomsday scenario, but life under an an inexorably sinking lid.

I'd be interested to know if anyone has studied the 'morph' period, say '85 - '95, although I suspect the 'stage to most avoid' would probably turn out to be 'housing bubble'.

It just struck me forcibly, Powerdownkiwi, that by using OTHERS primary produce ("extra-territorial resources") and exporting "added value" product, Japan (and other nations in a similar situation) has long benefitted from nations like NZ who are actually selling the primary produce at below cost when infrastructure subsidies are taken into account.

The cost of infrastructure subsidies, rail and road especially, are like a massive piece of your whole "sustainability" jigsaw. Environmentalists focus a lot of attention on the subsidies of roads in urban areas; yet the effect of subsidies of roads in rural areas, and ESPECIALLY the subsidy of rail transport that exists to support rural areas and their products, must be a lot more truly damaging to "sustainability".

Truly free markets actually would use less resources than markets where there are layer upon layer of government regulation and subsidies that we do not even think about.

With one massive proviso - if there's a finite amount of space, material and energy available.

Which is the case.

Left unregulated, you end in Rwanda (too many people, too much degradation, too few resources - they're all the same thing).

I think we've left it too late.

I still say the difference between Rwanda and Japan is explained by "culture", not by the relationship between resources and population level. Even if you have no resources, if you are as smart and hardworking as the Japanese, you can exploit all those parts of the world like NZ, who will sell you their primary produce at a lower cost than if you had had your own in the first place.

Of course if you're right, Japan and other huge resource importers will have to collapse along with everyone else - yet ability to pay for scarce resources must count in your favour. Theodore Dalrymple said something like this; if you dislike "ability to pay" as a means of rationing scarce resources, you wait until you have seen how demeaning of humanity all the alternatives are.

The alternatives, such as the command economy, are at least as bad in their very function, as the scarcity itself. The scarcity becomes a self-fulfilling prophecy if you don't let the free market function.

George Reisman says something like this. If ultimately, leaving people free, we DO run out of resources, we are no more morally guilty than if we had arbitrarily denied resources to people and imposed deprivation in the alleged interests of conserving the resources. We are certainly morally guilty if we deny resources to people, bring a halt to progress and capital accumulation, and fail to make the next technological leap forward that would have solved the problem. Imagine if the whole world had been run along "conservation" lines 200 years ago, and we'd remained so poor and backward that we'd never discovered and utilised fossil fuels. I am not being fanciful - most cultures in the world today, left to themselves, would NEVER have achieved this. Even Iran, with its massive oil reserves and its nuclear program, has to export crude oil and import refined petrol.

The BBC recently aired a talk with someone who had conducted a thought experiment at an environmental symposium. The question was asked, "imagine mankind discovered an economically viable, environmentally harmless source of energy that solved all our problems without requiring painful adjustments to our lifestyles - raise your hand if you think this would be a good thing". No-one raised their hand; the question was asked again and again, and the overwhelming consensus that emerged among the environmentalists present, was that this would be a very, very BAD thing.

This pretty much sums up for me, what the environmentalist movement is all about. They are the post-Christian society's killjoy puritan guilt-tripping religious freaks.


PhilBest - I see clearly the point(s) you miss.

No, Rwanda started out raped. They have a tradition of dividing land down the (increasing) generations, and trading-off bits as equity. They are down to the point where the plots are too small, are being overworked, and are mud-sliding onto each other. Alle same Haiti. It's a game of musical chairs - somebody misses out.

They all, physically, can't be resource rapists, any more that the planet can trade it's way out of where it is by all exporting and all saving.

The question to the environmentalists did not mention "and it will not be used to inpact the biosphere".

Whether the energy source could be benign, is only a tiny part of the real question. Clearly, folk like you would use the energy to complete the desecration of the planet, presumably calling your Reisman as a defence witness. I'd have kept my hand down, too. Ultimately folk like you will prevail, and they will lose their rearguard action.

Doesn't make you morally right. Far from it. Ignorance is excusable even if no excuse - denial never.

I call Reisman (never heard of him thankfully, so it's on the basis of this) self-justifying, and on behalf of my kids, a supporter of fraud.

And you a disciple? Touche.


I see the points you miss, too.

I said Rwanda's problems were all about "culture". You responded with a description of Rwanda's problems that proved my point.  They simply do not trust each other enough to progress to the "division of labour, specialisation, and trade" stage of human development. They are all still choosing to live in subsistence. It seems to escape you that this is worse for the environment, and well as for every other measure of human progress, than progressing to a modern capitalist society.

Re "impact on the biosphere". The amount of land required to support each human, has shrunk continually along with this process of economic progress.  Have you ever read anything on this - how much land per person did a prehistoric hunter-gatherer society need? How much forest did they devastate by "firing" it to drive prey into the open? The next stage; early subsistence agriculture. And so on. The earth's population has only exploded because we have got so much more efficient in our use of the resources we have. The Rwanda experience shows precisely how primitive culture is its own "brake" on population.

Each new wave of energy technology has been BETTER for the environment, not worse. This is where your thinking is all wrong. The "desecration of the planet" was a far more likely eventuality prior to the discovery of coal firstly, then other fossil fuels. The fact that primitive mankind did NOT destroy the entire ecosystem through deforestation is testimony to the ecosystem's robustness and vitality. The threat to the ecosystem is REDUCED from those times, not increased. Capitalism did not deforest Australia and North Africa. Capitalism has given mankind the ability to populate the earth in cities that only cover 1% or less of its land mass, while relying on division of labour and specialisation to allow a mere 5% of the workforce to produce the food to feed the other 95%. If Africa were made productive, even more of NZ and the USA's land could be returned to forest parks than what already has been and is.

Re Reisman, come on, I have recommended a classic essay of his to you more than once before and you have claimed to have read it.

“Environmentalism Refuted”, by George Reisman of the Ludwig Von Mises Institute:


I tell you, this essay is an eye-opener; the man is a genius.

Reisman points out the following:

We have actually barely begun to prospect the entire surface of the earth, and under the sea bed, for all known resources.

As mankind becomes more technically advanced, he discovers uses for more and more resources. Many of the resources we use most today, we did not use at all until we discovered how to use them.

There is no reason to believe that we have come to an end of that process. That is, we will yet discover resources that give us even more power over our well-being than the resources we currently make use of.

The more capital accumulated by mankind, the more access we get to resources. We can drill deeper, extract elements more efficiently, access the resources under the sea bed, and so on.

Furthermore, that accumulation of capital underlies the research and technological progress that bring ever more resources within our purvey.

Apart from what has been blasted into space, every molecule in every substance “used” by man, is still here and will be able to be re-used one day; a lot of it has merely been re-ordered to man’s advantage meanwhile. Every carbon molecule that has been burnt to extract energy, returns to the biosystem after a short time in the atmosphere, and will be able to be accessed again for the purpose of energy, by our descendants at some time in the future.

I have said all that for you before, Powerdownkiwi. One thing I have not previously focussed on about Reisman, is his discussion of VALUES and REASON. I am not at all in doubt who is morally right here, and who is guilty of fraud and betrayal of their descendants. If you haven't actually read that Reisman essay before, you still have a chance to see the light.

Sorry this thread is so far off topic. It is ironic that the resource conservationists are also predominantly defence "doves". What was I saying the other day? - In the event that NZ was invaded and taken over by the ChiComs, we'd soon find out just how much resources we had, how many highways could be built around the country, and how many people could actually live here. Viv Forbes must have read my comment.


From Viv Forbes latest:


Resource Sterilisation endangers National Security.


Extreme conservation policies are sterilising so much of Australia’s resources that it is becoming a threat to our national security.

Most wars are about land and resources.

In the colonial era, aggressive Europeans swarmed into Africa, the Americas and Australia attracted by underused land, minerals and timber. More recently, Hitler invaded Eastern Europe and Russia in the search for “living space” and access to Black Sea oil and Japan went to war attracted by the resources of South East Asia and Australia.

Australia is the odd man of Asia – a huge land mass with a small population.

Our populous and rapidly developing northern neighbours need the primary products that Australia has in abundance – food, fibres, minerals and energy. So they note with disbelief the way in which Australia is sterilising these valuable resources.

They see precious agricultural and forest land being swallowed by National Parks, World Heritage Reservations, Environmental Parks, Wild Rivers Declarations, Indigenous reservations and bans on land clearing. Unbelievably we have nine protected Wild Rivers, 11 World Heritage properties, 516 National Parks, 2,700 designated conservation areas and huge areas of government leasehold and aboriginal land. The latest proposal is a continuous conservation corridor running from Melbourne to Atherton. In all of these areas, agricultural and mining production are prohibited or increasingly restricted.

Our neighbours look on in amazement as foresters are locked out of State Forests, water courses become no-go zones for graziers and irrigation water is withdrawn from farmers and orchardists. Soon the whole Coral Sea will be locked up and beaches made off limits to fishermen. Future Australians are in danger of becoming a nation of peasants, poachers and smugglers in their own land.

Asia needs our abundant energy resources of coal, gas, oil shale and uranium. But they watch in disbelief as uranium mining is banned, gas is wasted in power generation, mining taxes are increased and there are threats to tax carbon and close our coal mines and power stations.

History has no examples where a small number of self-indulgent people have managed to squat on valuable land and idle resources forever. And our historic protectors are no longer invincible – the Royal Navy no longer controls the Indian Ocean or the South China Sea and the US Navy is no longer unchallenged in the Pacific.

Today the refugee flotilla is unarmed. If we continue sterilising our resources of land, oceans, food, minerals and energy, future fleets may not submit peacefully to Australian boarding parties.


Back on topic, I wonder if Neville has noticed THIS:

As if they shouldn't have LEARNED. So much for the "failure of free markets/deregulation".

"The FHA (Federal Housing Authority) has become the new toxic lender of first resort":

(From the Dr Housing Bubble Blog)


"The Federal Housing Administration (FHA) was created in 1934 during the Great Depression to give low to moderate income Americans a chance at pursuing the American dream of homeownership.  Even in the best of times, the FHA was only a small fraction of the mortgage market as it was never intended to be a big player.  Today the FHA now backs 30 percent of all loans outstanding and is quickly burning through its reserves.  You would think that the FHA would try going back to its core mission of helping those it initially set out to help.  Instead, it is now being used as a backend tool to fund absurd mortgages that don’t fit into any other current government loan programs.

In Southern California, where the median home price is $300,000, 4 out of 10 loans made since May of 2009 have been backed by FHA loans.  This is happening in a market that is 65 percent more expensive than the nationwide median home price.  Think this is bad enough?  Now the FHA will be funding loans for apartments out in Manhattan that have market rates of $820,000 to $3 million......"

Read the whole thing.

PhilBest - OK, I've read it.  In my opinion, myopic self-justification for a political/social point of view. The last bit is just a weak attempt to justify not having to do anything, whilst indulging.

Energy is the all of it. To say that "the carbon will return to the ground in a short time, for use by our descendants" is to be disingenuous, stupid, or something in between. The carbon in coal and oil took many millions of years to accumulate (and is only where forests stood, or biota thrived - not through to the centre of the planet) and will be gone in less than a 300-year span, of which we've done 200 of already.

The timespans are so hugely different, that only a fool would attempt to equate them.

Capital is irrelevant. I hope you get to understand that. It's a construct of one (very recent) species on this planet.

Please read this, with particular note of the graph 'fig 2'.



OK, I will read your recommendation too. Give me time.

Meanwhile, I will say:

The claimed amount of available oil has been proven "too low" again and again. I agree with Reisman in that mankind really has hardly started "prospecting" the entire planet. There are many more centuries of coal available.

A Saudi Oil Minister once said "the oil age will end, not for lack of oil, just as the stone age will end, not for lack of stones". He was arguing against "holding some back" in case nations like the USA that locked their available supplies away inconservation, one day ended up the only people with any. I agree with this guy - nations that didn't turn their oil into wealth while they had the chance will regret it.

"Capital is irrelevant". Ah, now we're seeing the ideological blinders you are wearing. A world without capital is Rwanda, everywhere. Is that better for the environment, or worse?

Here's a statement to wind you up further. The income generated by capital is captured roughly 70% by "labour" and 30% by the entrepreneur.  That is why Marx was completely and utterly WRONG. That is why workers in the USA earn so much more than workers in Bangladesh, even though the USA is awash with labour-replacing capital.

But I'll read that linked essay and comment again when I've got time.

Just another aside about "Capital", Powerdownkiwi.

Do you have any opinion on the philosopher Rudolf Steiner? Check him out, see if there is anything about him you find offensive. He is certainly not a "capitalist" although deeply opposed to Karl Marx on spiritual grounds. He was quite an environmentalist of sorts.

His genius shows through in a series of lectures he gave in 1922 on economics, a subject up till then outside of his writing and lecturing. He is hard to understand because he uses philosophical and spiritual terminology. But if you make the effort, considerable insights are to be had.

The title of the lecture series, "World Economy", merely refers to the world economy as a closed system, it is not some creepy "one-world government" proposal.



Back to THIS: (Powerdownkiwi's recommendation)


I have very little problem with that, it is an extremely informative presentation of the scientific facts that still enables one to draw one's own conclusions. I already knew most of what it said. I am still optimistic about resources and energy, and pessimistic about human folly.

These questions are primarily questions of VALUES and REASON as George Reisman said. One of the first things I look for in any investigation of energy availability, is how the investigation treats hydroelectric energy. Hydro is by far the "most plentiful" potential renewable. When the investigation presents some VALUE judgement AGAINST Hydro, by way of conclusion, that is nothing to do with its availability, the whole pretence to scientific credibility collapses. If the reason NOT to build more hydro dams, is that we would thereby alter ecosystems and turn valleys into lakes, THAT is a VALUE judgement, not a scientific issue of availability.

The same applies to landform and ecosystem arguments against mining and drilling and extraction of fossil fuels and other resources. Truly unique landforms and ecosystems are valued by millions upon millions of visitors and tourists and "users" (hunters, fishermen, trampers, mountaineers etc). But mountain ranges, valleys, rivers, species of insects and so on, are largely ubiquitous and unremarkable. The preservation of "a" valley anywhere just because it is a valley, or a hillside just because it is a hillside, when humans could benefit from an alteration of the landform and ecosystem without anybody to speak of even noticing; THAT is a value judgement of remarkable perversion, no less perverted because it is a commonplace today in decadent western society.

In cases where there is a small, elite, minority whose enjoyment of the ubiquitous landform will be lost, their robbing of humanity as a whole, of the use of the needed resource, is a far worse abuse than anything Karl Marx imagined of "capitalists". (By the way, I bet the ChiComs would strip-mine Milford Sound if it was ever in their power to do so).

Humanity's use of a landform to extract a resource, occupies only a blip on nature's timescale; the landform has existed for millenia and a few decades after the resource has been extracted, will be in a "state of nature" for millennia once more. This is expecially the case with modern, eco-sensitive methods of resource extraction and replenishment of nature. (Which incidentally will not be found in any "non capitalist" economy). Of course, a hydro dam will create a lake in perpetuity - so what? Has nature herself not created lakes through landslides and tectonic upheavals even in recent years?

On nuclear energy; the questions of danger and waste are VALUE questions, that need to be informed by scientific and factual understanding. The danger of nuclear is "concentrated" and able to be controlled by a concentration of risk management, in ways that energy sources with highly dispersed risk and injury profiles cannot economically be managed. Nobody suggests shutting down the fossil fuel industry because it ACTUALLY kills thousands of workers per year, yet nuclear is banned because it "might" kill millions of people some time in the next mllion years. That Lovelock green guy actually said he'd happily take a thick-walled canister of nuclear waste to heat his house. Dispersed widely enough, eg by high flying aircraft with sprayers, all the nuclear waste we could dream of, would be undetectable. SHOCK, HORROR. No; Luddite, unscientific, scare-mongering nonsense.

Co-generation is a non-controversial good idea. Jesse Ausubel of Rockefeller University is brimming over with bright ideas; if you haven't read THIS, you must do so:


I couldn't agree more about the good sense of mainstreaming "passive and active collection of solar energy" (as a priority over using it for electricity generation). I think you agree with me on the following, Powerdownkiwi: our urban planners are completely failing to engage with the full picture in pushing us into high density living. There are overwhelming "sustainability" arguments in favour of low density and against high density, which includes the "passive and active collection of solar energy". "CO2 abatement" is largely a fraudulent (on every level) pretext for blatant social engineering. I have said the following before on interest.co.nz:

In the brave new world of depleted resources, what makes sense? Living in a wholly separate house with its own plot of surrounding land, where you can burn biomass to heat your home, cook on a barbecue, hang washing on a line, grow your own vegetables and fruit trees, collect rainwater, compost your own waste and recycle "grey water", keep fowls or even a sheep or two, and have solar panels all over your roof and a wind turbine in the back yard; and buy produce from nearby small farms, vineyards and cottage industries?

The ONLY thing the so-called "green" planners have against low density living, is commuting distances. Commuting distances however are themselves a legacy of planning - zoning and monocentric urban modelling. Furthermore, as I have pointed out frequently, the low energy economy of the future is completely incapable of supporting the existing distribution of jobs in the modern economy. The wealth that pays the wages of the CBD's bureaucrats and office workers comes from energy in the first place, way back up the economic food chain.



OK. next lesson is exponential growth, and absolute limits.

Here's the first homework (same message as my 'mice' article on the blog, somewhat more professorially delivered:


Then the graph below. Take some time over this - this is the outfit Gareth Morgan poo-poo's for it's prophesies not having happened. If he'd taken the time/trouble to look at them, they weren't due until............. about now!


That's the '90's update, I think there was another. They have only ever reinforced the initial projections.

So you see why some of us expected something about now. Most of my types realised it wasn't worth defending yet another river (from a diminishing and finite list) against linear thinkers - we were out of time to educate.

We expected oil prices to sky, and bring the fiscal world to a shuddering collapse. We still pretty much reckon it has, although we were totally unaware of demand destruction, margins, and a few other things I've been learning about since. Now we realise that the levered fiscal system overshot, and not only has to correct, but back to a lowering base-line. Constantly shifting goal-posts.

English et al have, I presume, no idea how to tackle this. It's simply outside their experience, unsurprisingly. We need new leaders who 'get it', and they're not there yet.

Housing - There's no time to replace the existing stock, not enough resources (particularly energy) to do so. So you have to set up a retro-fit programme, and that's why the Greens pushed for the EECA insulation programme - maximum return first-up. Apparently one of the Nats said "we have no idea what you're talking about", when they had talks about it.

Housing built around the car, will be questionable, as will inner-city, mostly servicing and particularly food,but we haven't had the debate as to what is valid - I've gone a long way down the track, but not everyone can do what we do - there isn't the room for 60 acres per couple.

Limits again, PB. Always limits.

Oh, and mining takes energy. Sure, they might do it surgically, but you don't get tonnes/hour out of a straw.

have fun with Bartlett - he's a droll bugger, but smart.

graph didn't print.

google images : club of rome update projection


It is a pleasure to discuss this with someone who seems to be genuine, rather than a typical crypto-socialist greenie.

What I think is wrong with Prof. Bartlett's famous "exponential growth" thesis, is this: (derived from Julian Simon).

While SOME growth is exponential (and population growth today clearly is NOT - world population is probably going to stabilise at levels well below resource depletion), technological progress is exponential too. For example, 100 years ago, the "teleconference" was pure science fiction. Meanwhile, the ability of people from locations all over the world, to meet and discuss and agree, has steadily advanced; in both speed and cost-effectiveness. The teleconference represents the once-unthinkable "tail" of the graph here.

If you have never read Julian Simon's "A Reply To My Critics", it is essential reading:


I quote:

".........I do not say that "infinite substitutability" is possible now or at any future moment. What I do say is that substitutability is increasing with the passage of time; there have been more and cheaper substitutes for each raw material with the passage of time.

Finiteness by itself is not testable, except insofar as the fact that no one is able to state the absolute size of the relevant system (our cosmos) demonstrates the absence of finiteness in its dictionary sense. But the relevant evidence we have available - decreasing prices and increasing substitutability - is not what one would expect from a finite system. (Hence the critics are reduced to saying that all the evidence of history is merely "temporary" and must reverse "sometime", which is the sort of statement that is outside the canon of ordinary science.)

There is no doubt that my assertion of non-finiteness is anti-commonsensical and, indeed, mindboggling; regrettably (and contrary to what Grant and others assert) it is not explicit in standard economics, though it is not incompatible with standard received economics. But the critics simply do not come to grips with the matter that the available data are not consistent with the assumption of finiteness...."

Powerdownkiwi, I respect your honesty when you admit:

"........We expected oil prices to sky, and bring the fiscal world to a shuddering collapse. We still pretty much reckon it has, although we were totally unaware of demand destruction, margins, and a few other things I've been learning about since......."

I believe that the "free market" WILL take care of the "gap" between the availability of cheap oil, and the availability of substitutes, precisely because of the mechanisms you describe there.  We have working demonstrations in recent history, of human hubris in presuming to be able to do a better job by "planning", leading to colossal and catastrophic failure. A repeat of this hubris is something I fear very much more than the runout of cheap oil.

I flatly disagree with the narrative, with which I am familiar, that the end of cheap oil led to the global financial crisis. The global financial crisis was CAUSED by hubristic planning in so-called deferment of doomsday, on the art of the urban planning bureaucracies. The effect of limiting urban growth (while "urban" use stands at under 2% of the earth's surface) was to trigger financial bubbles of unprecedented monetary value, in land values within those entirely artificially constructed limits. Another factor is "self-fulfilling prophecy" type restrictions on progress such as bans on mining and damming. You say:

".......Most of my types realised it wasn't worth defending yet another river (from a diminishing and finite list)........"

Of the potential sites worldwide for hydro dams, what percentage have actually been built, Powerdownkiwi? And what is the proportion of the number of rivers on that list, to rivers that would not be suitable for hydro anyway? If NZ could generate ALL its electricity by hydro dams, including damming 3 more rivers, and that still left several thousand rivers untouched, where is the validity of your argument? What I am saying is that we SHOULD be "doing what we can" to provide humanity with energy by the best means, NOT using fraudulent arguments to hurt humanity here and now in the cause of averting some chimerical future where we "run out of rivers to dam".

I credit you with better, but a lot of this fraudulent alarmism seems to me to be the activity of political activists who wish to see a form of economic equality (Communism) established, to which end any means that undermines our society is co-opted, including a halt to the use of any resources that it is within their perverted power to halt. One constantly encounters very revealing political beliefs on the part of environmental alarmists. Engaging with the track record on resource and environmental issues, of "planned" economies, is not on their very limited moral radar. One suspects that many of them would have no objection whatever to the strip-mining of Milford Sound, provided this was done in the name of "the people" rather than for profit.

On housing, you say ".....there is no time to replace the existing stock....". It is a funny thing, Powerdownkiwi, but I find it next to impossible to get this message into the thick heads of our planning classes who are trying to do just that, replace our existing housing stock, so as to reduce commuting CO2 emissions and save the planet thereby. I think you are bright enough to understand just how wrong this is, and on how many levels. Retrofitting programs are an obvious good idea - maximum returns first up, as you say. I say the same about doing hydro dams on less than 1% of the earth's rivers - yet most environmentalists will disagree with me solely on the basis of their own perverted anti-human value judgements.

"........Housing built around the car, will be questionable, as will inner-city.........". At least you say, "as will inner-city". THAT is where our planners are 100% wrong in their utopian ideas. I think at least we understand each other - I realise the whole world probably can't live at 60 acres per couple at current population levels, but neither do I think that will ever be necessary. All I say is that low density living is a lot closer to "sustainable" than what the planners are currently trying to foist on us without rational debate. The high proportion of jobs in the economy that are non-productive, is the single most unsustainable thing about our existence, yet these jobs, and non-productive wealth transfers for their own sake, never seem to rate a mention by the sustainability alarmists. The policy analyst in the ministry of social development might feel saintly about catching the train to work, but the very service they are performing to society is well down the list of "essential/non essential" consumption of resources - and any paid job is a consumer of the resources that lie at the start of the wealth cycle.

Rudolf Steiner, in those 1922 lectures I recommend, says that we should call money "nature units" rather than dollars or pounds or marks, so as to remind people that all wealth required the use of a resource of nature for its creation. The longer time has gone on, the numbers of people in society that have been involved in resource extraction have diminished, especially relative to the increasing majority who consume the results of that extractory work. (This is because of human ingenuity/"spirit"/capital). Our society is so woolly headed about this now, that it seems to be assumed that we can all make a living writing reports to each other and serving coffee to each other, and all will be well. Stopping those evil miners and farmers and builders and other "resource rapists" is an action totally without consequences for our report-writing and coffee-serving means of supporting our existences. Yeah, right.

1. Simon is wrong. We went through resource-balance, and into depletion, back in 1980 (give or take).  See the Club of Rome/Limits to Growth graph)

William Catton (Emeritus Prof in the 'States somewhere nowadays, I think) wrote the classic "Overshoot", back about then. He was a Kiwi then....

I have read Simon and think he's a f.....wit. In the same boat as the economics prof you pointed me at before (I suspected the latter had read the former - both are physics-ignorant, in my book.

The only way (just look at even the optimistic timelines - the IEA until November last year, or for an extremetake, look up Hutter's 'Peak Oil Debunked) to address the debt now, is to forgive or default. Even in 'recession', we're chewing through 82-3 mbpd, just ticking over. Then you've got to repay the debt, which involves growth from where we are....

If it wasn't 'price at the margins' which drove oil prices, then it was a whole lot of hedgefund/retirement fund/investment money, under pressure to return, on a playing field in growth-driven overshoot, passing from 'investment' to 'investment'.

Then the music stopped.

Always was going to. We sold our house in 2004, shifted to our forestblock, built on it, and kept the build to $50,000 so as to be mortgage-clear by 2008. Saw it coming. Because of oil. I'm convinced you can read world fiscal health from now on via the cost of energy. With the proviso that oil underwrited the activity - a double blind.

I've got the figures, and an article somewhere, on hydro potential. Most of the good sites were identified 100 years ago - Aswan, Hoover. The Waipori cascade down here. Limits and repercussions abound. Silt (Roxburgh is over the diversion gates, or was, Aswan stopped the down-stream yearly flood fertilisation - it goes on. Then there's the point that steel-reinforced concrete srtuctures have a design life. The figure used to be 100 years - many are approaching that now. Do you drain and replace? The US is turning tarseal to gravel, and teachers are on 4-day weeks - where do replacements or greenfields dams come in that scenario?

I am neither communist, nor socialist. Nor am I cranially simplistic enough to be a free-marketeer. I don't think the resources are available to support more that 2 billion or so, at subsistence level, and maybe only one billion at our current level. So, while it's heart-string-tugging, there is no point in aiding Haiti or Pakistan to me. They can't ever get out of the mire from here, and I'm not volunteering to sacrifice myself to make space.

That's how it is.

By the way, we've probably just gone past peak copper - better get those generators ordered quick.

Yes, I worry about the disconnect too. My particular concern is specialisation - where folk learn to be better and better at less and less (building comes to mind currently - but I'm just waiting for the day we can't change a wheel without a qualification) until they are masters of SFA.

I brought up my two to do everything. Both can build houses, reassemble vehicles, use a lathe and a welder, and an axe. Both can survive and adapt. Which puts them well ahead of the bruised-thumb playstation types.

You still look at resource-extraction as linear, I think. Go back to that figure 2, in the first reference. Take a good look at the right-hand side of the bell-curve.

It's easier to get sustainable off a lower base. Simple as that. Too many balls in the air when the tightrope goes slack, otherwise. Most of the crap is just bought to bolster deficient egos, anyway. I've got mine so sorted I only have to write a column a month to live on. Well, the last bit's right........ :)

If you want my hydro credentials, google youtube.com, then powerdownkiwi.

That more than runs my house, although it doesn't have to - the primary source is solar.

When I was 8, I bought a Tintin book - Shooting Star. In it, Tintin's mate Professor Phostle declares he's worked out when a meteorite will obliterate the Earth. "Tomorrow", he claims, "I will be famous".

Even at 8, I knew he wouldn't.

Same with Brownlee's clain of wealth from resource extraction - at the end of the phase, there is no wealth, no underwriting and nothing to buy, ex recycling. Is that so uncomprehendable? That decline starts anywhere beyond peak supply rates, ie nowabouts.

Best get to that recycling regime with society intact, and spare resources in reserve.

The Brownlee full-steam-ahead approach is just intergenerationally stupid.


I am satisfied to leave it here - I am satisfied with the argument I have made. I think there simply are certain kinds of mind that cannot grasp the Simon/Reisman thesis.

I think your position is summed up by Julian Simon nicely in this sentence that I already quoted above:

"........the critics are reduced to saying that all the evidence of history is merely "temporary" and must reverse "sometime", which is the sort of statement that is outside the canon of ordinary science......."

I want to see several years of evidence that the resource doomsayers are right, not the blip that comes along every few years; and so should anyone who is considering "mitigation" policies that would hurt humanity, possibly needlessly. Note that no-one tookJulian Simon up on any new bet that he offered, after Ehrlich had been made to look stupid.

Did you notice the letter from F. A. Hayek to Julian Simon? (Included in the item I linked to above). I think there are some points in there that you and I will both agree with.

March 22, 1981

Dear Professor Simon,

I have never before written a fan letter to a professional colleague, but to discover that you have in your Economics of Population Growth provided the empirical evidence for what with me is the result of a life-time of theoretical speculation, is too exciting an experience not to share it with you. The upshot of my theoretical work has been the conclusion that those traditional rules of conduct (esp. of several property) which led to the greatest increases of the numbers of the groups practicing them leads to their displacing the others -- not on "Darwinian" principles but because based on the transmission of learned rules -- a concept of evolution which is much older than Darwin. I doubt whether welfare economics has really much helped you to the right conclusions. I claim as little as you do that population growth as such is good -- only that it is the cause of the selection of the morals which guide our individual action. It follows, of course, that our fear of a population explosion is unjustified so long as the local increases are the result of groups being able to feed larger numbers, but may become a severe embarrassment if we start subsidizing the growth of groups unable to feed themselves.




What do you see wrong with what I quoted the other day from Theodore Dalrymple; the free market price system of rationing seems quite repugnant until you consider all the alternative systems of rationing scarce resources? People in history (and in history yet to come?) who played God and decided who was to live and who was to be "eliminated"  are the purest embodiment of evil in human history. What is more, such people NEVER have the moral capacity to discern "truth" - they always carry out their "mission to save humanity" on the basis of lies.

I've always lookd ahead, and put the brakes on if I see something requiring it.

This isn't about Marx, Simon, or God, for that matter.

What we've done to the fishstocks of the planet, we'll - sorry you'll - do to everything else.

Only when you've stuffed it, will you be convinced.

On behalf of my kids, that's too late, too selfish, too much cognitive dissonance.

Just remember - Simon was simple.