Bubble Watch

Evan Soltas has an article looking at how the decline in oil prices could end up hitting the banking sector. He writes,

That link to the financial system has people on edge. Andrew Levin, a former adviser to Ben Bernanke and Janet Yellen, has been ringing the "recession" alarm bell as loud as he can. Larry Summers has warned policymakers to "heed the fears of financial markets."

The banks are tied up in this for a simple reason: America’s fracking boom was brought to you by very aggressive financing. Buying land, drilling a well, renting equipment, hiring a team, and securing pipeline or rail space to ship out the oil — all that takes capital, and the banks provided it at low interest rates with little equity from the borrower.

Banks lent so much to frackers that the cost of debt service consumed 60 percent of cash flow before oil prices fell, according to the Energy Information Administration. The collapse in oil prices makes that kind of debt unpayable. Frackers will default and force banks to eat the loss. (Emphasis in the original)

He also has a graph showing how this exposure is hitting banks stocks.

Tim Hartford also writes about how cheap oil might trickle through the economy. He's worried that consumers are using the spare cash from cheap gas to save and not spend more. I'm skeptical of the notion that savings is bad, and think that it could be the cushion to soften the blow of a fall. However, he may be right that innovation in the clean energy sector may slow because of the disincentive to invest that industry. On the other hand, how much of the clean energy sector is being propped up by government subsidies?

I'm not willing to bet on a big slow just yet, but both articles are worth a read to understand the difficult times that may be ahead.

Postscript: Above, Soltas mentions the fracking boom and how it was brought on in part by aggressive financing of, among other things, rail space for shipping oil. Working in the rail industry, I for one know that there has been a slow down in shipments of energy-based commodities. Coal shipments have been hit the hardest, but other areas are being hit as well.