[anigbrowl]

In many ways it was a final inflation of the bubble, as profit-takers getting out from a structurally unsound housing & CDO market looked for somewhere to park their excess cash and found a delightfully under-regulated exchange on which to do so. A great number of the oil future contracts were traded on an exchange called ICE, which had managed to set itself up in such a way that both US and UK financial regulators each thought the other was supervising it, when in fact neither were. It's a rather convoluted story that hasn't really been told yet, as it was overshadowed by subsequent events. the reasons I don't think it directly caused the full-scale market collapse are that a) no big banks got massively exposed to the oil price inflation - they could see it was speculative, and it inflated and popped so quickly that they never structured their positions around it; and b) the subprime market and all the other distortions (zero down, stated income, etc.) were already looking ropey by then.

Soaring oil prices might have pushed a few consumers over the edge into mortgage default, but even if that hadn't happened I think the market would have imploded within a few months of the 2008 election anyway. Recall that Bear Stearns had to put up $3.2 bn to rescue its two hedge funds in June of 2007, and Merrill Lynch's inability to sell more than about 12% of the CDO assets it seized was the first clue (for the public at large) that the financial industry had a systemic rather than a localized problem - and this was almost a year before the oil price spike. By the time that occurred, the stock market was in decline, Bush had already administered a $145 bn stimulus (remember that $800 tax rebate in 2008?), Bear had collapsed, the NY Fed had underwriting their acquisition by JP Morgan to the tune of $25 billion. So our economy was already in poor shape by March of 08, which was when oil prices suddenly took off like a rocket. At the time, I wondered if the sudden rise was in response to the structural weaknesses in the US and European economies, which shared both enormous housing booms and huge amounts of counterparty risk: it seemed as if traders were looking at oil as a substitute currency (energy is a much better candidate for solid money than gold) and using it to impose a sort of reverse devaluation of the dollar and euro. With hindsight I don't really think so, though - it was a simple pile-in rather than the dawning of a new economic concept.

BTW thanks for that CIBC paper you linked to below - although I don't quite agree with the 'big picture' analysis it's still a great read.