This video (below) explains how we got into this credit crisis. It’s a lot of greedy business folk who borrow, borrow, and then borrow more money. Why do they borrow the money? How do they make money by borrowing money? Watch the animated infographics for an explanation.
I’m sure the causes of the financial mess are more complex than the video makes out, but oh well, green happens to be my favorite color. Besides, it’d take much longer to explain everything.
Crisis of Credit is part of Jonathan Jarvis‘ thesis work in media design.
[via infosthetics | Thanks, Max, Lily, and everyone else]
Just so you know rational self interest works and has been the engine that has created everything of value that we enjoy today.
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… forgot the greedy home buyers who borrowed more than they could pay off.
Moral of the story: Everyone made bad decisions. No one can just dump money in to solve it, so the firms that bought the time bombs must fail and more intelligent firms who don’t get into the mess will come out on top later. It’s Darwinian economics: survival of the fittest. No one is exempt. It’s going to be difficult and long to get out of the crisis, but that’s how a free market system works! The government bailing out all the big guys (because they “can’t be allowed to fail”) may help in the short run, but long-term it undermines the whole free enterprise system.
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Indeed, mistakes were made. Please don’t question the system. At least until I receive my multi-million-dollar golden parachute.
Wow, that was a great, simple, explanation.
you left out the first step: Congress passed the laws that allowed, nay, mandated sub-prime mortgages to people who could not afford it. One banks were required to make hot-potato loans 9pass it off before they default), the rest is inevitable.
congress also prevented the Bush administration’s attempt to rein this in several years ago
thanks barney frank!
The deregulation started with Reagan. Remember Keating and the s & l crisis. The most relevant legislation was the Commodity Futures Modernization Act which prohibited regulation of these derivatives. It was authored by Phil Gramm. He also authored the Gramm-Leach-Bliley Act which was the final repeal of Glass-Steagall.
In any event, CFMA also deregulated oil speculation. While authored by Gramm, it was negotiated with Larry Summers and signed by Clinton. Reagaonomics merged with Rubinomics. However, Barney Frank did receive about $740,000 from the industry in 2005-2006. His support of the bailout was probably payoff for these contributions.
What a wonderful world!
One more thing. The Bush administration had no interest in reining this in since all their Wall Street friends were making tons of money. In fact, the artificially low interest rates facilitated the sub-prime lending. The failure to have the SEC and the Federal Reserve look into what was going on had more to do with this crisis than Fannie Mae and Freddie Mac. In fact, the administration used federal law to pre-empt NY state law when Elliot Spitzer tried to investigate the predatory lending. This is probably why the FBI tapped Spitzer’s phone calls.
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Oh sweet jesus, not another thread full of superficial talking points.
Hey guys, if you want people to believe your wild and distorted theories, you need to at least provide references (primary references preferred).
There’s plenty of blame to go around; any explanation that pins blame on one group or individual is a clear indication of ideological/political blindness. And blaming things like the CRA is just lame (see e.g. http://www.usnews.com/blogs/the-home-front/2008/12/17/sheila-bair-stop-blaming-the-community-reinvestment-act.html).
The special sauce, without which we might have just a popped bubble rather than a train wreck, is too much leverage. Excessive leverage is seen at the scene of every major financial meltdown- LTCM is still my favorite example, because it’s so well documented (see, e.g., When Genius Failed by Roger Lowenstein). Having better controls on systemic leverage won’t prevent all financial debacles, but it would sure prevent the chain reactions that occur when people are forced to deleverage, which always happens because, well, something always happens that exposes the brittleness of over-leveraged positions.
Without insane levels of credit default swaps, which are like unregulated, uncollateralized insurance policies, we’d be in much better shape right now (see, e.g. AIG).
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Imagine how much better it would have been if it had the facts right. (Banks usually deposit money in the Federal Reserve, not borrow from it. The vast majority of those mortgages are still performing; even in the worst tranches, it’s around 67 percent.)
Or included some of the details (like why cutting the interest rate stimulates the economy — the very same thing that the Eeevil Investment Bankers are doing: investing.)
Or mentioned that the Eevil Investment Bankers that were pushing the sub-prime mortgages were government-sponsored organizations (Fannie and Freddie), or that the reason they were pushing the subprimes was because they were required to by law if they wanted to continue to make prime mortgages.
It’s a good thing it was a thesis project in media design; he’d have gotten an F in Econ.
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I think This American Life did a significantly better job than this video myself, and they did it entirely through verbal explanations. The video is just slightly too loaded for my taste, and the mortgage issue is largely glossed over about WHY the investors WANT mortgages as an investment.
I find it interesting that the “irresponsible home buyers” were smoking and had 4 children.