Explaining The Credit Crisis (VIDEO)

Check out this video explaining the credit crisis:

WATCH:

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Comments

[notAMoron]

08:33 PM on 03/09/2009

Right after they explained leverage, they explained mortgages. He should have mentioned that the homeowners were using leverage as well.

No mention of speculators or flippers (although the houses did flip when they went down in value).

[Keith52]

02:35 PM on 03/09/2009

The point where I say wait a minute is when they say, "not surprisingly the loans default" or something like that. This is where all the bloviating is taking place.

Right wing is blaming the mortgage / home buyers and the left wing is blaming the loan institutions who offered loans to people and accepted the risk. My opinion is that the institutions are obligated to renegotiate and help homeowners any way they can and homeowners are obligated to find a way to complete their obligation. I think this is what is happening. But I also think that the worth of the home should have nothing to do with a repackaging of the terms of a mortgage. Hopefully the value of homes will come back up when this crisis passes. But that is the risk everyone takes in the housing market. Do you agree? (Huff posters?)

[ObamacratInCA]

03:58 PM on 03/08/2009

NPR did an incredible job of simplifying the collapse of the U.S. banking system:

http://www.thisamericanlife.org/Radio_Episode.aspx?episode=375

[jerryny]

04:02 AM on 03/08/2009

The best explanation that I have found is the article by Michael Lewis "the End" at portfolio.com.

http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom

[Keith52]

03:11 PM on 03/09/2009

OMG! That was the best! Thank you!!

[kboard tapper]

03:16 AM on 03/08/2009

For those such inclined, listening to a long radio presentation, these are the two best presentations I have heard that explain what happened:
The Giant Pool of Money - http://www.thislife.org/Radio_Episode.aspx?sched=1242
Another Frightening Show About the Economy - http://www.thisamericanlife.org/Radio_Episode.aspx?sched=1263

[manitoumackinac]

01:36 PM on 03/07/2009

It's public relations propaganda to say that the sole problem of this mess is that too many people who couldn't qualify for a mortgage caused this mess.

Half of all subprime borrowers would have qualified for prime loans. They went for the subprime because it was marketed to them as a better deal, they didn't quite understand what they were getting into.

(Separate and
Unequal Predatory Lending in America, pp.2 & 32.)

[Perry Forman]

01:16 PM on 03/07/2009

But there's more too it from what I've read. CDS's are insurance. But unlike say the fire insurance you have on your home, that only you can buy. I can also buy this insurance. From what I've read, because CDS's are/were unregulated, insurance against a set of bonds defaulting could be sold 10x over.

And there were several problems with CDS's. Not only could they be sold to people who didn't even own the paper the insurance was written against, the entity writting the CDS policy had no/nada/zilch capital requirements. So all these companies wrote tons and tons of these policies never expecting to ever have to pay them off. So they never, ever put aside any money to ever pay off these policies.

So now you have all these policies that are due, but no one actually has any money to pay off the policy. Hence why a company like AIG has troubles.

And also since they were unregulated, they can only guess at the volume of CDS's out there. Some guesstimate it's in the trillions of dollars.

So no one in the world has any idea

[GrahamInCanada]

12:05 AM on 03/08/2009

When you say CDS's are insurance, while you are correct, from the rest of your post it does not seem that you understand what you said.

The word "insurance" has several meanings. One of the meanings is a contract by which you pay premiums to protect against loss, car insurance, life insurance, etc. That is not the meaning of insurance when you say CDS's are insurance. The meaning that applies to CDS's is simply a means of protection, like when you say that calcium is insurance against brittle bones.

When "insurance" is used in traders terminology, they simply mean a means of protection, and do not mean a contract of insurance.

So, for example, I can theoretically buy "insurance" against your house burning down by purchasing the right to sell my house to somebody at an agreed cost if your house burns down. This is not the same type of "insurance" that you buy against your house burning down, which is a contract of insurance. (mine was a futures contract, and in particular I bought a put option on my house referencing a fire at your house, not an insurance contract).

[Sundialsvc4]

11:52 AM on 03/09/2009

A security is, fundamentally, "a negotiable promise." Under the right (i.e. non-fraudulent) conditions you can not only buy-and-sell that promise, but other promises derived from it.

But what happens if the promise ISN'T credible? What if "it can be reasonably forseen that the person making the promise does not have the capacity to fulfill it, or would not have that capacity under circumstances that can be reasonably anticipated?" Then, it becomes fraud.

And if that fraud happily becomes "an accepted practice," and legislatures the world around turn their eyes and laws and law-enforcement away from the obvious ... you have, well, THIS.

What to do? Well, you've got insolvency. The system is completely gummed-up with "all those worthless zeroes." Zeroes on the credit-side, and zeroes on the debit-side, but all mixed-up together. You CANNOT throw any amount of money at it: you've got to put the banks, one by one, into the dry-dock and start cleaning the trash out. You've also got to outlaw the practices that produced them (because right now they are happily producing more!). And finally, when they start to use the word "multi-national," you've got to assert ... and make it stick ... that "the bounds of your own nation" really do mean something.

[Rich Evans]

07:54 AM on 03/07/2009

I stopped watching after the subprime portion. Subprime mortgaqes are not the problem and never has been. The problem was leverage all across the credit spectrum. Subprime loans were those given to people with bad credit. Thus, they may have been able to afford the home, but they had some credit troubles along the way. The leverage problem was something bigger.

Lenders were giving out too much credit to all borrowers. So if you bought a house in the last four years it is likely that it's beyond a reasonable leverage. This is especially true if you bought that house based on what you qualified for rather than what you afford. People are lazy, so many just assume that the lenders figured out how much they could afford. So after they received their huge check from the lender, they then called a real-estate agent who then priced the borrower in homes that they could not afford because agents generally make bigger commissions on pricier homes. The buyers then bought the homes and there you have it - millions of people in default.

There are many subprime lenders that are still doing okay. The reason being is that they leveraged their loans correctly. Further, many of these lenders understood that they were dealing with riskier borrowers and adjusted accordingly. Anyway...this is the way I saw it.

[joebiz]

03:15 AM on 03/07/2009

Good video. However, the government's role was left out.

Everytime a home was sold, the property would be reassessed, meaning higher tax rates that were then transferred to state capitals and thus borrowed against in the form of bonds. The bonds were then used for public works, deferred maintenance, and other projects. The government wanted additional revenue streams and wanted more home owners to buy bigger and more expensive homes and get into greater debt.

Politicians kept quiet.

[Rich Evans]

07:59 AM on 03/07/2009

This is why I detest flippers. Many poor people were displaced due to increased property taxes because a flipper merely installed some granite counter tops in a home located in a poor neighborhood. These homes were given ridiculous estimates, which blew the roof off of property taxes.

[Sundialsvc4]

11:53 AM on 03/09/2009

They did more or less the same thing with the tulips, too...

[familydamato]

08:11 PM on 03/06/2009

What is wrong with our government?
Think outside the box: combine spending with tax cuts in one easy plan!

Quickly help the Big Three, end the foreclosure crisis and pump cash into the economy – without government bailouts! Change we can believe in!!!
There are millions of Americans on the verge of retirement watching their pension and IRA savings slashed in value; 401’s have become 101’s!!!
Why not encourage Americans to invest in the Big Three, buy cars made in the USA and/or foreclosures?

For example, give the option to withdraw up to $35,000 from their IRA’s and pension savings tax free if they buy autos made in the USA or invest the money in the BIG THREE? Make a requirement that, in order to be able to withdraw the money tax free, the Big Three investor must leave the money in Big Three stock for at least 3 years.
With regard to foreclosures, allow us to withdraw up to $450,000 tax free to buy a foreclosure (or home going into foreclosure). Require that these foreclosures and autos must be purchased in cash – no mortgage – no loans and no government bailouts!
This would quickly provide jobs, help American auto makers, provide capital to the banks, clean up the foreclosure blight and give Americans a chance to recoup some of their retirement loses – without borrowing from China and bankrupting American taxpayers.

[runningduck]

03:52 AM on 03/07/2009

What do you think the impact will be from millions of people pulling money out of their 401k retirement funds, also known as stocks? Doing this would likely compound the credit problems by pushing stock lower while also creating a cash crisis as money drains from the investment market.

[familydamato]

07:14 AM on 03/07/2009

Most of the people I know have already pulled most of their money out of wall street - they are in treasuries and bank cd's.

[GrahamInCanada]

12:15 AM on 03/08/2009

If I understand the IRA purpose, it would be ridiculous to encourage consumers to use the IRA to buy depreciating assets (new cars) or crazy risk investments (in companies teetering on the edge of bankruptcy, or foreclosed real estate). If these moneys are used for that, what, then, are consumers supposed to use to retire?

One of the major problems with the US market is the atomization of the investors (who needs a pension managed by professionals? Manage your own funds, with all your spare time after working and raising your family) against the traders, and the constant propaganda of the traders that all pools of capital should be gambled on their market, no matter the purpose of the pool of capital.

The stock market is a risky game that should be played only with excess capital; this provides creative use for excess capital. But this idea that every penny of the economy should be sunk into stocks, of the big three or any companies, is wrong headed.

[judiNJ]

04:42 PM on 03/06/2009

This should be shown in every high school class in the country along with one that explains what a balloon mortgage is and why it is POISON. I think econ 101 should be a requirement for everyhigh school student to prevent their being such a mess again.

[Sundialsvc4]

01:41 PM on 03/06/2009

That's an exceptionally fine video, John!

[Justin Fogarty]

01:19 PM on 03/06/2009

"No one was worried because as soon as they sold the mortgage to the next guy, it was his problem."

That about sums up the root cause right there - incentives were structured for short term gains for each player in the game.

[Fraugher]

01:00 PM on 03/06/2009

Time to add the part about the government, their connection to the bankers, and bailing the bankers out with the homeowners money that doesn't exist yet...

[urnumbersix]

11:19 AM on 03/06/2009

Thanks -
I consider myself pretty smart, but this video really helped my understanding about what's going on.

I'm going to forward it to everyone!