After the 2008 Financial Crisis, the Economy Was Fracked Up

Summary

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Podcast Summary: "After the 2008 Financial Crisis, the Economy Was Fracked Up"

The New Yorker Radio Hour
Host: David Remnick
Date: November 13, 2018

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Main Theme & Purpose

This episode explores the intersection of the 2008 financial crisis and the rise of the U.S. fracking industry. Host David Remnick and guests discuss the financial mechanisms that enabled fracking’s explosive growth, the environmental and economic consequences, and what this reveals about America’s energy policy and response to crises. The episode also delves into the unfulfilled promises of the post-2008 green stimulus and the ongoing debate over carbon pricing, concluding with a personal account of climate disaster’s human toll.

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Key Discussion Points & Insights

1. Fracking’s Unlikely Boom and Its Roots in the Financial Crisis

• Fracking as an Expensive Enterprise:
  • Eliza Griswold (01:07): “One of the things about fracking that has always been true is that for the companies it's very expensive. The key ingredient in fracking isn't so much chemicals as it is capital.”
• Cheap Capital Post-2008:
  • Bethany McLean explains how the Federal Reserve’s low-interest rates after the crisis made it possible for fracking companies to borrow heavily, even without profitability (01:21–02:10).
  • Jim Chanos: “There was no way this would have happened on the scale it had without Wall Street embracing it and providing willingly providing capital to this industry.” (02:10)

2. Environmental and Economic Promises vs. Reality

• From Cleaner Fuel to Oil Boom:
  • Initially sold as a “bridge fuel” to a cleaner energy economy, fracking led to a glut of natural gas, collapsing prices and shifting focus to oil (03:02–03:31).
  • Jim Chanos: “The frackers have been so successful in producing natural gas prices that they collapsed the price and so it is very cheap and a lot of its just simply flared off these days not even used.” (03:31)
• Structural Flaws in the Fracking Model:
  • Fracked wells see rapid production declines, requiring constant reinvestment—unlike conventional wells (03:55–04:45).

3. Financial Irregularities and “Ponzi-onomics”

• Overstated Profits, Wall Street Excess:
  • Jim Chanos noticed evidence by 2010 that fracking companies "were overstating profits..." and "managed to convince Wall Street... that two plus two is five and Wall Street loves that equation." (04:50–05:30)
  • Bethany McLean draws parallels to the WorldCom scandal: “The WorldCom scandal essentially was WorldCom taking all of the costs that should have been running through its income statement and figuring out ways to put them on its balance sheet instead so that its reported profits looked much much better than they were...” (05:30)
  • Discussion touches on management incentive structures that reward volume, not profitability, perpetuating uneconomic drilling (06:26–07:08).
• The “Unintentional Ponzi Scheme” Parallel:
  • Bethany McLean: “I've described fracking as an unintentional Ponzi scheme... the key question isn’t so much the financial one, it’s actually more existential: if the companies stop being funded by this avalanche of cheap capital, how much energy can they actually produce?” (07:08–07:24)

4. Risk of Collapse & Historical Parallels

• No Real Profits Despite the Boom:
  • Jim Chanos: “For the entire industry in a complete cycle price cycle and fracking... it was uneconomic. It was free cash flow negative for the investors…” (08:08)
• Echoes of the Right-before-the-Crash Mortgage Bubble:
  • Bethany McLean compares fracking’s unsustainable investment to the pre-2008 mortgage frenzy: “During a bubble capital can be put to uses that in retrospect will clearly be seen to be uneconomic...” (09:03)

5. Stimulus, Green Jobs, and Missed Opportunities

• Obama’s Green Promise vs. Reality:
  • Adam Davidson reflects that while the Obama administration promised a green jobs revolution post-2008, the stimulus mainly benefited incumbent industries due to political compromises (10:55–11:43).
  • "A $900 billion stimulus or a little less... $90 billion or so focused on green energy... but they were very expensive programs that didn’t really have the stimulative impact we wanted..." (11:43)

6. The Case for a Carbon Tax

• Broad Bipartisan Support, But Little Action:
  • Adam Davidson and former Treasury Secretary Hank Paulson discuss the proposed carbon tax:
    • Paulson: “Carbon emissions, it’s a pollutant and we don’t tax it. Matter of fact, we do the opposite, there are tax incentives... for developing and using carbon-based fuels. So that is very, very perverse.” (13:31–14:16)
    • On messaging: “It’s probably not best politically to call it a carbon tax... call it anything you want, but... it will create more jobs...” (14:16ff)
    • “The government shouldn’t be saying we pick solar or we pick wind. The market will pick them if we eliminate the subsidies which we are giving... it’s not like any these are new industries... it’s just a waste of dollars.” (15:00)

7. Climate Change’s Human Toll

• First-Person Story: Felicia Byrd, Houston Resident (16:31–19:14):
  • Felicia recounts displacement, repeated losses to flooding (Hurricane Allison in 2001, Ike in 2008, Harvey in 2017), and the challenges of restarting after climate disasters.
    • “Starting over is hard, you know, so I'm just gonna just see how this goes.” (19:10)

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Notable Quotes & Memorable Moments

• Bethany McLean on the essence of fracking’s boom:
  “Fracking wouldn't have been possible without the 2008 financial crisis. What happened is the Federal Reserve lowered interest rates dramatically and that made borrowing money very cheap... fracking companies... were suddenly awash in cash just because the cost of borrowing money was so low.” (01:21)
• Jim Chanos on fracking’s financial chicanery:
  “They've managed to convince Wall Street typically on the back of a lot of debt raised that two plus two is five and Wall Street loves that equation.” (05:00)
• Bethany McLean on industry incentives:
  “In many cases it was on production, which is kind of an important point because even when it was uneconomic to produce, if they could raise money, they would produce because their bonus pool would be bigger based on production not profitability.” (06:26)
• Paulson’s take on carbon pricing:
  “It’s probably not best politically to call it a carbon tax... call it anything you want... it will create more jobs... the government shouldn’t be saying we pick solar or we pick wind. The market will pick them if we eliminate the subsidies which we are giving...” (14:19–15:27)
• Felicia Byrd's resilience:
  “Starting over is hard, you know, so I'm just gonna just see how this goes.” (19:10)

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Timestamps for Important Segments

• Introduction and Setup – 00:22
• Fracking’s Costs & Capital Connection – 01:07
• Financial Crisis’ Role in Fracking Boom – 01:21–02:20
• Fracking’s Environmental and Economic Realities – 03:02–03:44
• Wall Street’s Role and Overstated Profits – 04:50–05:56
• Industry Incentives and Executive Compensation – 06:26–07:08
• Ponzi Scheme Analogy and Risks – 07:08–08:08
• Bubble Parallels with the Mortgage Crisis – 09:03–10:07
• Transcript on Obama’s Green Stimulus, Carbon Tax, and Paulson Interview – 10:55–15:27
• First-Person Climate Disaster Story (Felicia Byrd) – 16:31–19:14

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Episode Takeaways

• Fracking’s rapid growth was fueled by cheap, post-crisis capital rather than inherent economic sustainability.
• The industry’s boom brought environmental controversy and questionable financial practices.
• Despite green jobs rhetoric, most post-crisis stimulus cemented the dominance of fossil fuels.
• Economists and policymakers like Hank Paulson advocate for carbon pricing as a rational market-based solution, though political obstacles remain.
• Climate change is immediate and personal for affected communities, as illustrated by the story from Houston.

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For listeners seeking an in-depth look at the intersection of finance, energy, and climate policy since 2008, this episode provides compelling analysis and firsthand testimony, rich with memorable insights and expert commentary.

Transcript

[A]

From one world trade center in manhattan this is the new yorker radio hour a co production of the new yorker and wnyc studios.

[B]

Welcome to the new yorker radio hour i'm david remnant in some parts of the country right now that sounds hydraulic drills and compressors used in fracking is a constant presence in texas the dakotas pennsylvania and other places too fracking has given us an energy boom it's made the us into the world's leading producer of oil and gas by some estimates fracking of course has been controversial it creates a lot of methane which is a greenhouse gas it's been blamed for poisoning water tables and other environmental consequences eliza griswold's been writing a lot on the fracking industry and she's discovered that it's controversial in other ways as well here's eliza i've been.

[A]

Looking into fracking for seven years i've been in people's farms and in their backyards looking at the human costs of america's energy boom one of the things about fracking that has always been true is that for the companies it's very.

[C]

Expensive the key ingredient in fracking isn't so much chemicals as it is capital it's an extraordinarily expensive proposition that's bethany.

[A]

Maclean she's a financial journalist who brought down enron and she's written a new book saudi america one of bethany's key insights is that fracking wouldn't have been possible without the two thousand eight financial crisis what happened is that the federal reserve lowered interest rates dramatically and that made borrowing money very cheap that meant companies could raise money hand over fist and fracking companies many of which weren't really turning a profit were suddenly awash in cash just because the cost of borrowing money was so low jim chanos a very well known hedge fund manager agrees that this was the moment critical.

[D]

To the industry there was no way this would have happened on the scale it had without wall street embracing it and and providing willingly providing capital to.

[A]

This industry growth in this industry has been remarkable tens of thousands of wells have gone in all over the country hundreds of thousands of miles of pipeline crisscross the landscape if you look at all of this infrastructure that has sprung up as a result of easy money you could say that fracking is a monument to the two thousand eight financial crisis so i met with bethany and jim not at some rural well site but where the action really happens in a swank office in midtown manhattan so fracking was initially sold as an environmental positive that it would be a bridge fuel to cleaner energy economy did that turn out to be the case so.

[C]

I think it's complicated i think natural gas there are some arguments that it is a cleaner fuel because of the that because it's replacing coal and thereby lowering carbon emissions but as the frackers produce so much natural gas that they totally crushed the price of natural gas they instead switched to oil and so most of the value in fracking or most of what people think about with fracking today is not so much natural gas it's actually oil as bethany points.

[D]

Out the frackers have been so successful in producing natural gas prices that they collapsed the price and so it is very cheap and a lot of it's just simply flared off these days not even used.

[A]

So a crisis is always an opening for new ways of thinking and jim where did you and others of your contemporaries where did your associates see opportunities after the crash in energy.

[D]

So i began to educate myself and my team here on the economics of fracking and how it was different from say the integrated oil business when exxon would drill a deep well after a lot of testing they were pretty certain that if they said the well had probably a twenty to forty year life it probably a twenty to forty year life and that once the well was drilled it was annual maintenance and worker salaries whatever to keep the rig going it was different in the fracking there because the nature of the technology the energy was released at the front end of your drilling process and then declined rapidly it meant that you had to keep putting more and more money in to keep your production even steady so.

[A]

Jim you started seeing flaws in the numbers in twenty ten we were starting.

[D]

To see evidence in chesapeake and some of the others the earlier frackers that if you just did some calculations and you realized how much money they were reinvesting back in the business it should have yielded even more production than it was and so what it meant to us basically was that they were overstating profits and so it had this vicious cycle because what happened was money flooded in not only because of the federal reserve's easy policy but because the companies looked better than they really were they've managed to convince wall street typically on the back of a lot of debt raised that two plus two is five and wall street loves that equation the.

[C]

Most famous example from that is actually before the crisis is from the bankruptcy of worldcom back in the early two thousands and the worldcom scandal essentially was worldco worldcom taking all of the costs that should have been running through its income statement and figuring out ways to put them on its balance sheet instead so that its reported profits looked much much better than they were and that was the essence of the worldcom fraud and that's probably the most famous one you can point to am i right.

[D]

And the ceo is still in prison.

[A]

For that doing that wow why don't we call it accounting fraud when it comes to fracking.

[D]

It'S a good question.

[C]

Well sometimes things are only accounting fraud after a bankruptcy right so that's that's one issue but accounting is an art rather than a science and there's an awful lot of latitude in it so sometimes things you can look at and say are misleading are not necessarily something that a prosecutor would find illegal one.

[D]

Other little thing to note on this and it's you find these things in the places that are sort of a little harder to look one of the reasons that kept us attracted to this industry as short sellers is all the ways in which the fracking management was able to enrich itself off the top if you will often management you had to look at their incentive compensation and how they were paid and in many cases it was on production which is kind of an important point because even when it was uneconomic to produce if they could raise money they would produce because their bonus pool would be bigger based on production not profitability bethany you.

[A]

Have been really careful to say that the verdict is still out on fracking but you've also described fracking as an unintentional ponzi scheme what do you mean by that and what are the consequences for the future because eventually all ponzi.

[C]

Schemes collapse there are some companies that are making some money today and so to me the key question isn't so much the financial one it's actually kind of the more existential if the companies stop being funded by this avalanche of cheap capital how much energy can they actually produce how much oil and gas can they actually produce how the good acreage there the really key acreage in the core how far does that extend and so to me that's the key question is what will this be revealed to be eventually i don't know from a financial standpoint that it ever becomes a calamity but it becomes a calamity if we depend on this oil and gas and think it's going to grow forever i think jim may have a slightly more skeptical take than i do.

[D]

Know we did just a look back over the last five years of the industry and the reason that was sort of convenient was it took us over a period of better and better fracking technology but prices that were very high that went very low and are back to high the five years also coincides with basically the average life of one of these wells and the figure was negative for the entire industry so for the entire industry in a complete cycle price cycle and fracking and it was uneconomic it was free cash flow negative for the investors and so wall street will be willing to overlook that when times are good but when they get fearful they shut off capital so is.

[A]

There a parallel then to be made between fracking now and mortgages in the two thousand.

[C]

I don't let me see i think there is a parallel to be made in that during a bubble capital can be put to uses that in retrospect will clearly be seen to be uneconomic right and so in the run up to the financial crisis you had banks lenders making mortgages to people who didn't have a hope of paying them back and afterwards you say how could that have happened and there's an explanation for it but most of it was a mania people forgot about the idea that somebody had to pay the money back and so i think there's an analogy to this today when i get asked the question why on earth would wall street fund these guys this is uneconomic you must be wrong i say no no no just look at the history of wall street they funded plenty of things that are uneconomic at the end of the day and you realize wall street's incredibly short term the idea that they're going to be taking into account something that might happen even in a decade is just it's beyond beyond the reach of today's capital markets i think.

[B]

That'S bethany mclean her new book on the fracking economy is called saudi america we also heard from hedge fund manager jim chanos they spoke with eliza griswold who writes about fracking and politics and many other subjects for the new yorker i'm david remnick and i'm here with our ace financial reporter adam davidson we're talking about the connections between the two thousand eight financial crisis and the climate crisis bethany maclean and others link fracking very directly to the crash of two thousand eight which seems ironic because the stimulus package was supposed to be very very strong on renewable energies green jobs was a major theme as obama sold the recovery to the american people what happened to all that so.

[E]

Whenever you essentially pump huge amounts of money into an economy the federal reserve was doing that through its central bank mechanisms the government was doing that through its stimulus programs those were necessary at the time they really were and they prevented our lives from being dramatically worse but you're inevitably i mean truly inevitably going to create perverse outcomes you're going to create bubbles somewhere out there also the way the stimulus was adjusted because of republican opposition made it even more of a transfer to incumbent industries they tried to put in a little bit of stuff for green energy i don't think it was very well designed in.

[B]

Terms of the amount or in terms of where it was directed a lot.

[E]

Of the green energy and specifically green jobs programs were very poorly designed there's something called pathways out of poverty it was just an ugly kludgy device that tried to get very very poor people to be trained to insulate homes i did a lot of reporting on it it was a disaster but a nine hundred billion dollars stimulus or a little less a ninety billion or so of it focus on green energy there's probably more weatherized homes and more solar panels in america today which is probably a good thing but they were very expensive programs that didn't really have the stimulative impact we wanted i'd say this goes back to the fundamental thing that's not what we need that's not enough and what many democrat leaning economists and republican leaning economists believe in carbon tax it's a very simple thing carbon costs society some amount we don't know exactly how much but we can estimate it pretty well and we should tax companies for the carbon they emit this is an idea a lot of democrats like but hank paulson who's like the poster child for mainstream republican economic views he's a huge fan and i talked to him about it last week i remember when you were named treasury secretary it was my job at npr to do the quick who's this hank paulson fellow story and so i had to kind of do a quick biography of you and it was a bit hard to map you onto existing political dynamics because you are a republican or you were at the time do you still consider yourself.

[F]

A republican i consider myself to be a classic old style republican so i'm.

[E]

Going to take that as a no.

[F]

And you're right i've always been interested in conservation i've always been interested in the environment and that i had come out very early and recommending putting a price on carbon okay carbon emissions it's a pollutant and we don't tax it a matter of fact we do the opposite there are tax incentives and other incentives for developing and using carbon based fuels so that is very very perverse it's probably not best politically to call it a carbon tax you could call it a carbon fee call it anything you want but if you put i.

[E]

Would call it the jobs bill okay.

[F]

I think that's a good idea the jobs bill because what it will do is it ultimately will create more jobs the costs may come early there'll be jobs lost in some areas but there'll be a lot of jobs created where we rebuild infrastructure but what that does is it changes behavior consumer behavior investor behavior we won't have to pick winners i don't believe that the government should be saying we pick solar or we pick wind the market will pick them if we eliminate the subsidies which we are giving and i don't understand any basis for giving subsidies for oil or coal or any carbon based fuels it's not like there's any shortage of them it's not like any these are new industries even if someone didn't believe in the climate risk it's just a waste of dollars all you need to do is take away the incentives to invest in fossil fuels and create a level playing field.

[B]

Hank paulson talking with the new yorker's adam davidson paulson makes it sound i don't want to say easy but at least possible to make some headway against climate change without the kind of massive job loss that would cripple our economy either with democrats taking control of the house of representatives it's conceivable just conceivable that a carbon tax or as adam prefers to call it the jobs bill could at least be up for discussion but it's never going to pass under this president but we have to note that climate change is already happening it's with us right now as the atmosphere heats up extreme weather becomes more frequent more destructive and very often the people affected most severely are the ones who can least afford it when hurricane harvey dumped a monstrous forty inches of rain on southeast texas some thirty thousand people were evacuated and among them was a houston woman named phylicia byrd and a year later despite the efforts of aid agencies she's still waiting to get back on her feet.

[G]

I had just got released from the hospital when the flood came and i was staying at extended care for thirty days during that thirty days is when the storm took place so when my time was up there i couldn't go back home because i had lost everything after that i went to a place called george r brown convention center they had everything everything they even had a walmart set up inside the convention center and all this stuff was free the actual physical situation no it wasn't good it was extremely cold extremely cold so i stayed there for like two months after that actually what happened because i would leave sometime for two or three days and go to a relative mainly my daughters and the last time i left and went to her house when i came back they had moved all my stuff so i had to go to a temporary shelter now that i'm going to be honest that was horrible and i stayed there two days and i mean it was horrible horrible so two days after that they brought us to a shelter called residents of emancipation so some of us qualify for housing program and this apartment complex facility is what was open and it's called new hope housing so i've been in new hope housing now for six months my plan now i hope to one day be able to live on the southwest side of houston that's where the majority of my family live even though parts of that city did flood bad i'm not i don't know much about piping and drainage and all that but i know we have a lot of bios so i'm not really scared but i keep in the back of my mind that it can happen it can happen again i've had to start over because of floods i was part of the allison flood in two thousand one i was part of the ike flood in two thousand eight starting over is hard you know so i'm just gonna just see how this goes.

[B]

That'S felicia bird in houston that's our show for today i'm david remnick and i want to thank you for joining me i hope you'll join.

[A]

Us next time the new yorker radio hour is a co production of wnyc studios and the new yorker our theme music was composed and performed by meryl garbus of tune yards with additional music by alexis quadrata the new yorker radio hour is supported in part by the churina endowment fund.