Over at Vimeo, Jonathan Jarvis has created a ten-minute film that offers an overview of the credit crisis. If you’ve been struggling to understand what went wrong with the American economy, this will give you some of the basics:
If you’d like more information, I encourage you to carve out time to listen to two radio broadcasts, both from NPR’s This American Life:
- “The Giant Pool of Money” explains how the housing bubble was created by a chain of people who thought the old rules of money no longer applied.
- “Another Frightening Show About the Economy” takes a deeper look at the developing credit crisis.
Finally, you may want to check out my list of essential reading about the market meltdown. The information is five months old now, but still useful.
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Videos like that should be aired during commercials on TV – that way the average joe would understand what’s going on as well!
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FANTASTIC!! This should be required viewing! Thanks for sharing.
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I saw this few days ago on a blog. Loveed this video. Very creative and simplified version of what’s going on today!
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They seem to complete ignore the implications of fractional reserve lending.
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Very well done design-wise.
But, I think that, by leaving out some key factors, it perpetuates the falsehood that the cause of the crisis was simply “wallstreet greed.”
In fact, I would say that it borders on being a lie to say that sub-prime lending was just “an idea” that brokers and lenders came up with to get rich. Fannie and Freddie held nearly half of all US mortgages. A fact that many had been warning about for years. They accomplished this by receiving all kinds of advantages against other lenders from the government and thus were able to have a major role in standardizing what types of loans “should” be available. Add to that the shady involvement of government in the institutions that rated the risk. In other words, this video does not do well to imply that lenders made up where those boxes got cut into different risk levels.
Government involvement is not just key to how sub-prime lending got going functionally. It also created something called “moral hazard” in that it gave investors inflated incentive to invest in these mortgages because, by pulling levers, government was taking on liability. Investors (correctly as it turns out) knew that politicians would not (could not) allow these institutions to fail since it would be practically under their direction at this point. As we all know, politicians decided (as the investors banked on) to tap the wealth of tax-payers to effectively turn a risky-investment-gone-failed into a risky-investment-gone-not-so-risky.
The problem with simplifying situations that are not simple is that people then draw simple and inaccurate conclusions.
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As an art historian, I love the idea of the crisis being visualized for two reasons: 1 – the majority of people in this world are visual learners, so having a visual explanation rather than just an an auditory one makes a lot of sense. 2- the implications of the images themselves, here, particularly, what struck me (and sort of connects with wheaton4prez’s comment about wall street investor greed, is that the investors are depicted as fat while the family members who own mortgages are depicted as thin. As we all know, or should know, by know, fatness and thinness have very particular moral codes attached to them by our culture, and by visualizing investors, who are described as greedy, as fat, we are perpetuating the idea that fat is bad and is about gluttony and greed while thin is good and about (financial) health and moral uprightness. This is extremely problematic, and simultaneously fascinating to see it played out here.
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@Adam, well there’s only so much you can do in a short time span…there’s all sorts of details they could have gone into.
I enjoyed the TIA podcast immensely, listened to them several times.
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Great Video, thanks for posting this. I read your blog regularly but have never seen vimeo.
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saw this video earlier and admit its a good visualization for those that understand better this way. Its a great tool to help people out there become better aware of the situations surrounding them. Kudos to the producer!
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No doc mortgages exists a long time before 9/11. I worked in the mortgage industry in the early 90s and we had them THEN.
Also – the federal government were pushing making mortgages easier to less than desirable people (as in couldn’t really afford to own a house) again well before the time period this discusses.
I agree, that it is visually very very good. However, it misses a lot of very important parts of history.
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I listened to those two episodes of TAL recently, and I think I probably missed some details because I was too busy shouting, or gasping, or muttering… should listen to them again. They’re definitely worth the time – and except that I nearly broke a couple of plates, they help pass dish washing time.
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The video was well polished, but I also believe it is missing some key facts. Fannie and Freddie played a huge role in this meltdown by encouraging the risky lending behavior, which is riddled with conflicts of interest because they were GSEs (Government Sponsored Enterprises). Subprime loans were not invented out of wall st. greed, they came out of the the Community Reinvestment Act of the 1970s and are basically Affirmative Action. Finally it should be noted that on several occasions over the last decade the risk that Fannie and Freddie posed to our economy was brought before congress, and the idea of regulation was shot down repeatedly by Senator Barney Frank, whose boyfriend at the time was an executive at Freddie Mac. Barney Frank somehow came through all of this unscathed, the media still loves him and trusts him as an authority on the meltdown.
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Sigh…I guess I get to come to another website to debunk the urban myth that the CRA had anything to do with the meltdown. Sheila Bair, head of the FDIC and Randall Kroszner, a member of the Federal Reserve System’s Board of Governors, have both separately come out with studies that show that the CRA had nothing to do with the subprime loans. Most of the foreclosures in Cali and Miami are in high-income areas where the CRA wouldn’t come into play.
I keep hearing all this stuff about the CRA and its connection to the housing problem, but I never see any proof, just faulty logic that tries to connect the two.
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Interesting video, what are your thoughts on this NYT link Published: September 30, 1999,
http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260
Here are some quotes
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“Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.”
“If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”
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Good video! And some of the comments about adding details have some validity. But My humble opinion would suggest adding; 1. How money is created from OUR Signatures. and 2. How the banks use fractional banking. I feel these two facts are real important. Then throw in a little, “The federal reserve is a private corporation” and you might have something! LOL
Or maybe a little about how they make Mortgage Back Security’s out of State and Federal Prison Numbers. Now that’s a cartoon I could get into.
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In my comment I didn’t claim the CRA caused the crisis, I only stated that the CRA is the genesis of sub-prime lending. The video stated that wall street investors invented sub- prime lending which is not the case. While the actual CRA loans themselves may not have been as risky as other less regulated sub-prime loans and did not directly cause the meltdown, I contend that the CRA gave legitimacy to sub-prime lending that may have been a contributing factor to the explosion of risky lending that caused the crisis.
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It’s a good movie but misses two things/doesn’t stress them enough:
- the fraudulent rating the rating agencies doled out to nearly everything, making it appear as AAA instead of sub-prime or risky.
- the gigantic (55 trillion dollars gigantic) card house the CDOs have created – a reason why many companies like AIG have to be bailed out or the 5 trillion in real assets would balloon into the 55 trillion of obligations.
Concerning the CRA:
The CRA was only a anti-discrimination tool – before it banks didn’t even give you an offer if you came from a “non preferable (= non-white) area, regardless of you could pay or not. The CRA just said that it is forbidden to discriminate based on where you live. It did not force banks to lend money to anyone, it just forced banks to treat non-white customers based on their financial assets and possibilities instead of their colour or name.
It wasn’t the government that forced the poor, poor bankers to make trillions (1 trillion just in the last three years in the US, dozens over the last 15 years) with fees, commissions and bonuses based on how many mortgages they sold, it was the bankers and mortgage brokers who lobbied for loosened restrictions (which politicians were eager to give them though).
NINAs were the idea of financial lobbyists who needed to sell more mortgages to keep their money making scheme running, not of politicians, although they were willing helpers as were the people obtaining mortgages they never could pay back.
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Yes. CRA had nothing to do with changing lending trends. All it did was make it so that banks could be sued and/or would not receive permits to build in new areas if they could not show compliance with quotas and whatever hack analysis groups like ACORN could come up with.
Nah. That couldn’t possibly affect the types of loans banks would offer. Could it?
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Finally a good and easy to understand video created regarding the financial crisis.
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Another great series to listen also by NPR is Planet Money. I listen to their podcasts every M,W,F when the are distributed. They are extremely informative and they often carry over to This American Life.
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This is very inaccurate to put it mildly.
The truth of the matter is that PEOPLE racked up debt due to over spending on credit cards, mortgage and such. Who are these people? Ones that can afford it? No. Enter the politically correct disease.
Because of PC, everyone was allowed to borrow at will, whether they were capable of repaying or not. When the economy slowed, those who purchased responsibly and managed or did not accumulate debt were and are fine. Those who wanted but really could not afford are in trouble.
At what point do we stop bailing out the people who are continually taking?
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This is far too simplistic to provide a real explanation. As usual, everyone is looking for shortcuts, which got us in this mess to begin with, and not trully understanding the situation. Bascially, the video says:
Investment Bankers = Pure Evil and fat
Lenders = bad people and only moderately fat
Mortgage brokers = kind of bad and average weight
Home Owners = A beacon of pure good and really really in shape
I’m not saying the bankers weren’t evil or stupid, just that many of these homeowners were to.
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I thought the second round of homeowners were fat people who were smoking and had lots of kids. As in the irresponsible people who shouldn’t be buying a house.
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Good video… I enjoyed it a lot.
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Your might also like a couple of videos Enspire Learning produced last fall:
Understanding the Financial Crisis
http://www.youtube.com/watch?v=gF6LbFDjvW0
The Mortgage Banking Meltdown
http://www.youtube.com/watch?v=HSjEyOp2dEM
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I think a lot of people have over analyzed this video. The point of the video is to give a BASIC explanation of what’s happening.
Second, the bankers reminded me of Rich Uncle Pennybags from monopoly. I didn’t see them as gluttonous monsters just because they were fat in the video.
I laughed out loud when the sub-prime family came on screen (smoking with a bunch of crying kids).
Last point, I agree that the role of the government in the current crisis needs to be shown to the public. It wasn’t just a bunch of bankers that caused this problem. Maybe another video could be made about the government’s role…
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Mike K.,
The “CRAs caused it!” response seems knee-jerk and unrealistic to me, but unfortunately I don’t have any information to back that up. Can you point us to some sources about CRAs vs. what actually caused the rise in defaults? The video was great, and now I want to keep learning.
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The CRA’s involvment in the housing crisis is definately a controversy. I don’t really see much evidence from either side. However, the other poster who shot down my post as an “Urban Myth” quoted Sheila Bair and Randall Kroszner from the FED and the FDIC. I am not sure that I would trust their studies because both of those organizations have some responsibilities in overseeing the CRA and would most likely be biased.
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Interesting video, it does clarify some of the issues with this crisis (although, as others have mentioned, covering up or pushing aside some others). I could toss out two other factors, the ending of the Glass-Steagall Act (which separated investment and commercial banks, preventing the sort of selling mortgages to other bankers to be packaged that the video depicts) and the Commodity Futures Modernization Act (which exempted credit default swaps from federal regulation).
Are either of these the sole cause of this crisis? No. Are they contributing factors? Yes. Will there be politically motivated arguments about the contributions of these and other factors of this crisis, blamed or defended on basis of the arguers’ beliefs. Without Question.
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I also shouted a lot when listening to This American Life’s episode, but enjoyed it immensely and listened to it 3 times! Also, Planet Money from NPR (podcast) also has little tidbits every now and then. Highly recommended the TAL episode!
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Jon, I’m a credit trader (please don’t hate me) who’s been struggling to explain the credit crisis in layman’s terms to my family. This video is great. I agree with other comments, it SHOULD be aired during commercials so that the public can get facts and not partisan views.
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Very informative, and well presented.
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I feel that this picture is very relevant here:
http://graphjam.com/2008/10/16/song-chart-memes-credit-crunch-explanations/
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Thanks for sharing this! I have shared this to my family as well. We’ve learned a lot.
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I thought it’s a good basic explanation. It did ignore a number of issues:
1. 2004 SEC decision to exempt 5 major investment firms from the leveraging limits that resulted in firms like Lehman brothers being leveraged 40 to 1.
2. As someone mentioned above – the role of rating agencies and the fact that so-called AAA-rated CDOs weren’t as “safe” as AAA securities should be. In fact, some of those AAA securities were laced with sub-prime mortgages, and the only way the math models they were built on worked was if the real estate market could grow by 7% a year forever. So now nobody trusts the AAA ratings of all CDOs, even CDOs backed not by mortgages by but corporate bonds, and all CDOs lost value resulting in further losses for banks.
3. The effect of mark-to-market rule that SEC decided to apply to CDOs in 2007 that required banks to estimate the CDOs value based on the current market price. This meant that as the CDO values started to fall, banks suddenly had less capital on their books and needed to add more money to reserve. They started to try to get rid of these CDOs which drove the values even further down. Constant need to add money to reserve for current and future losses left less and less money for lending even to good businesses. Not to mention that banks started to be afraid to lend money to each other since nobody knew what other banks had on their books.
4. The whole speculation with Credit Default Swaps. Many such videos and programs referred to Credit Default Swaps as “insurance”, but unlike with real insurance a) the issuer of Credit Default Swaps didn’t need to show they have sufficient capital b) you don’t need to own a CDO to buy Credit Default Swaps for it c) several people can buy Credit Default Swaps for the same CDO. It’s a little like me and 9 other people buying insurance on somebody else’s house in the hope it will burn. But then the insurer may not have enough money to pay all the policy holders…
There are other causes as posters above mentioned, but as an introductory video was fine.
@Rob Paige: while you are right that a lot of people racked up debt, you cannot really blame the credit crisis on political correctness. As this video and many posts showed, the losses by banks are much much higher than actual losses in mortgages. The banks losses we hear about every day are many times higher than the actual losses in bad loans.
And no, responsible people aren’t “just fine”. Responsible people lost a large percentage of their savings. Responsible people are losing jobs all over the country even in the industries that have nothing to do with banking. Responsible businesses are closing as well because they can’t get credit – yes, not all credit is bad, businesses need credit; otherwise, they’d have to keep all their money in a vault instead of investing it into the business itself. As to while we are bailing irresponsible people – well while I don’t necessarily agree with everything government does and have problems with some of the provisions, some bailouts are necessary to prevent next 10 years of economy contracting like in Japan or even worse another Great Depression.
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