Credit Crisis Visualized
 

A graphic design friend of mine passed along this little flash animation. It makes the basics of the credit crisis incredibly clear. I figured folks here would enjoy watching it, too!

I was going to embed it, but I can't seem to figure out how to do that. So here's a link:
http://www.crisisofcredit.com/


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What do you think of the animation?
Did it put the crisis in perspective for you?
Did you find it too simple?
Did it keep your interest?
How many people really will benefit from this level of instruction?
Do you want to vent about your opinions? Bash it? Want to explain its virtues or pitfalls from an investment professional or educational perspective?
Have at it!

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This flash did a wonderful job of clarifying the concepts for me. A lot of the ideas I'd heard before, such as banks buying sub-prime mortgages and so on. But this animation put it into more of a big-picture, incredibly simple-to-understand format. No frills, just basic. It did seem a bit too simple, there of course is more to it, such as homeowners also being investors. It did bother me a bit that they made all of the bank guys and investment guys varying degrees of fat greedy guys who don't quite seem human - when in fact they're very real people with interesting problems to deal with on a daily basis. Their depiction of the family purchasing a home with a sub-prime mortgage is also rather horrifying. I'm not sure why people equate four children with poverty, smoking, tatoos and alcoholism, but that's not usually the case. Many of the people who defaulted on their lones were responsible people who were simply uneducated on the complexity of owning their own homes.

Demonizing investors? Come on, everyone's doing it...
Demonizing the uneducated, gulible poor? Come on, everyone's doing it... sure they have tatoos and they smoke. There aren't any good pople out there who have tatoos and who smoke. I'm going to put it into my flash! I'm going to put these into my flash! Er... yeah. Ok. Let's reinforce negative stereotypes. That's healthy

The quality is better on that link of yours (plus HD is available), but it's on YouTube too, so I'll embed it here:



I'll give it a watch when I have time later on today.

Thanks for the embed! Looking forward to hearing your response. It takes about 10 minutes to get through.

It was a very interesting and clear explaination. My only problem is the section where they show the bankers holding the CDO's that become almost worthless because all the mortgage payment streams dry up and instead become foreclosed houses. As I understand it more than 90% of homeowners are making payments so the losses shouldn't be that crippling. I realize that they wrote these mortgages with highly leveraged borrowed money but that is no excuse for puttiing themselves in the position of total failure just because real estate prices corrected. Surely they knew like most of us that house prices had to come down. Also, I don't understand what is so terrible about letting them fail. Won't they just be replaced with banks who do not take such irresponsible risks?

It is my understanding that there is some confusion on who owns what, and even sound banks (ie- Wells Fargo) that stayed clear of risky mortgages have been seriously impacted.

fistf, if you leveraged your money at 30 to 1, you only need a 3.3% fall in revenues for the scheme to go under water.

At 10%, you're in meltdown.

As for leaving the banks to go down, that would be great... except now you have a banking system without JP Morgan, Bank of America, Citigroup, Wells Fargo, etc and the most important part. Confidence.

The system of credit is integral to a market driven system, and the system of credit is fundamentally based on trust. Confidence breeds trust. Without trust, there is NO credit system. Without confidence there is no trust. Without the illusion of stability, there is no confidence.

What would practically all of the large and most of the small banks simultaneously imploding do to confidence for a generation?

If the credit system breaks down, you have an incredibly rapid race to the abyss.

Revenue flows for most industries are not regular, but lumpy. Things like very short-term debts - 'commercial paper' - are used by businesses large and small to smooth over the lumpiness of their trading. If the facility of short-term borrowing on a relatively easy terms and non-punitive rates shuts down - as it did for a short time in September - then you immediately run into a wall of bankruptcies, redundancies, etc with foreclosures and defaults flowing... and round and round we go.

Also, the leveraging technique was used for stock purchases, bond purchases, currency speculation, commodity speculation, etc, etc.

And guess what? the losses on those bets were racking up at more than 10% per day in some cases.

Housing was one of the detonators for the crisis, but the explosives were the system itself after around 1987 and the bringing in of the 'Greenspan put'.

Constantly increasing asset prices - not value - at any cost.

Now that monetary policy is dead (0% fed funds rate) welcome to the hyperinflation gambit.

Yeah, this is confusing, I guess it is like dominoes. Also it seems clear now that the government could have (should have) prevented this by either forbidding such high leveraged positions by the banks and/or forcing the security insurers like AIG to actually have enough money on hand to pay the claims. I understand they got around being regulated like real insurance companies by calling the insurance they sold credit swaps or some such thing.

thanks... It is almost what I understood it to be. I'll be passing this along to other friends and digging in for more research myself in better understanding what I didn't before the viewing.

This is a very common misperception. Pretty much ALL national banks were involved in the sub-prime lending industry - some have just managed to keep the public less aware of it. Wells Fargo is a great example - their sub-prime lending was some of the riskiest paper out there - they just keep quiet about it.

Maybe they knew it, in the back of their minds, but they were hoping the explosion (er, implosion) wouldn't happen before they got a chance to pass the bomb on to someone else, in that great game of hot potato.

great vid

enjoyed how the colors are green and gold,drives home the point that its all about money, wondering where I can find out why someone would want to buy all the risky mortgages especially the hedge funds as I was under the impression that hedge funds had the most money and therefore the smartest people, I know I'm optimistic

This is a good intro, which should give the viewer an Economics 101 understanding of the crisis. It doesn't get into important issues like how government regulations like loosened mortgage rules and SEC lever ratio exemptions allowed risky lending. It also doesn't address why a bailout is necessary, how a single institution failing can bankrupt entire industries through credit default swaps, or what will happen to credit if these firms go under.
Hyperinflation? More like liquidity trap.
The SEC passed a lever ratio exemption for five firms about five years ago. Before that, banks couldn't lever at more than 12:1. In addition to borrowing, levering includes backing assets like mortgages with cash -- for every $12 owed to you, you have to have $1 in the bank. By the time it all came crashing down, these firms were levering between 30:1 and 40:1. At 40:1, a 2.5% net capital loss would result in illiquidity.

Those five firms? Bear Sterns, Goldman Sachs, Lehman Brothers, Merril Lynch, and Morgan Stanley.

Here's a writeup.
The Big Picture | How SEC Regulatory Exemptions Helped Lead to Collapse

If you have an hour, this is an excellent CNBC special about the housing market meltdown. Explains quite a bit:

http://www.hulu.com/watch/59026/cnbc-originals-house-of-cards?c=News-and-Information

This is why I get so goddamned pissed off when all I hear from conservatives is gibberish about Fannie and Freddie. They don't want to talk about the fact that the investment bankers are the ones that killed everything. F&F are easy targets because they can point to all the campaign donations they gave to the democrats (and neglect to mention all the money they gave to republicans).


The Big Picture: Private Sector Loan Losses vs Fannie/Freddie

Fannie and Freddie are still culpable, they were involved with subprime mortgages.

The hyperinflation gambit comes in the form of the attempt to re-inflate the economy, no matter the cost.

Think of a set of old fashioned scales, with a weight on one side and an empty bucket with some holes in it on the other.

Trying to re-inflate the economy by pumping out cash is like filling the bucket from a fast flowing hose, aiming to bring the scales into balance. Just.

The Fed are already buying bonds across the curve. This is where hyperinflationary behaviour starts. Bond rates are starting to trickle outwards...

Yes, the position now is a liquidity trap. The attempt to get out of it has already seen the US govt and Fed pump in up from $7.5 to $11 trillion in spending, insurance, guarantees, asset programs, bailouts, etc, etc...

CNBC are very, very conservative in some of their numbers.

If 'the bucket' has too much water in it, then the whole system very quickly tips over towards hyperinflation. Things to look for will be more monetization of govt debt by the fed, a blow out of bond rates, a fall in the dollar, and god knows what else...

And that's just one hyperinflationary scenario... from govt... There are others, just as possible at the moment.

Deflation for now, but beware the 'cure'.

Economics is a social science instead of a natural science for a reason.

its times like this that outline how arbitrary currency is. why represent action when you can just have action.

the most frightening thing is that low economic times are usually followed by war.:expressionless: