Crisis of Credit Visualized

[nerdgirl 0]

This visualization of the credit crisis and all of the component parts (lowering Federal Reserve rate, securitization, credit default swaps, collateralization, leverage) is perhaps the most concise and accessible explanation I’ve encountered.

So for all of the authorized and unauthorized armchair economists out there:

What’s wrong with the explanation offered?

What critical piece or contribution to the credit crisis does it over-simplify?

What does it miss?

/Marg

Act as if everything you do matters, while laughing at yourself for thinking anything you do matters.
Tibetan Buddhist saying

[jcd11235 0]

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What critical piece or contribution to the credit crisis does it over-simplify?

The video oversimplified the tactics used by the banks and mortgage brokers to persuade the (resident) borrowers to take out ARM mortgages so the banks would have something to sell to the investors.

The payment structure of some of the loans also made it attractive to individual investors to treat houses as short term investments, since the low/no down payment and/or relatively small initial payments allowed them to buy more leverage with their money. That contributed to an increasing house supply, exacerbating the trend of decreasing market value of houses.

Overall, I thought the video was pretty good.

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[Misternatural 0]

I take up the following issues with the piece;

1) A misrepresentation of Wall St as being composed solely of investment banks which dealt mainly in collateralized debt obligations.

This leads the viewer to believe that ALL Wall St investors were investing in and trying to make an unsavory profit on these now toxic mortgage backed securities.

Wall st as a locale is much more diverse and industrious than that. A much larger percentage of investors deal in equities or corporate investments which drive most of the industries worldwide. Corporations manufacture just about everything and provide services that make modern life possible.

I found the depiction of a generalized view of wall st. an insulting, fear based, misrepresentation.

2) The statement "everyone went bankrupt" is false of course not everyone went bankrupt or Goldman Sachs and JP Morgan would already be gone.

3) The statement "houses are worthless" another fear based misrepresentation- Homes are not WORTHLESS, period.

The mechanics of the piece are very educational but the sensationalized misrepresentations are what help drive the ignorance and fear which WILL create more of a crisis then is actually the case.

Wealth and capital did not just explode like the depicted bombs and evaporate into thin air- they merely need to be redirected and made to start moving again. FEAR will continue to clog the system if it is allowed to soak into peoples minds with well meaning but misleading pieces like this one.

Beware of the collateralizing and monetization of your desires.
D S #3.1415

[Capt.Slog 0]

Quote

This visualization of the credit crisis and all of the component parts (lowering Federal Reserve rate, securitization, credit default swaps, collateralization, leverage) is perhaps the most concise and accessible explanation I’ve encountered.

So for all of the authorized and unauthorized armchair economists out there:

What’s wrong with the explanation offered?

What critical piece or contribution to the credit crisis does it over-simplify?

What does it miss?

/Marg

It misses the contribution of the Fed under Greenspan in consistently over-reacting to "crises", driving instability and leading eventually to interest rates that fed the housing bubble.

And it forgot to mention that Clinton got a BJ.

[Elisha 1]

Not bad, but I liked this one better:
http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1&ncl=true

[Capt.Slog 0]

Quote

Not bad, but I liked this one better:
http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1&ncl=true

Did you see THIS?

[timmyfitz 0]

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And it forgot to mention that Clinton got a BJ.

[StreetScooby 5]

The piece is pretty well done, albeit a bit over dramatized wrto leverage.

In our financial industry, there are four broad types of paper:
1) Green paper
2) Stocks
3) Bonds
4) Insurance policies

We all know and love green paper.

The difference between stocks/bonds and insurance policies is pretty straight forward, in simplistic terms. If a trader buys or sells a "real" stock or bond, within 3 days or less the green paper and "white" paper change accounts at a Federal Reserve Bank. Otherwise, it can be viewed as an insurance policy. There are a huge number of insurance policies in our system: options, futures, CDS, and all other "derivatives".

Lots of people loaded up on insurance policies. You could actually go out and buy more insurance than was available in the underlying market for the stock/bond. Once those underlying instruments starting going bad, people wanted to call in their insurance policies. The early ones calling it in made it. The rest didn't, in addition to those folks that actually wrote the insurance policy.

In a simple nut shell, that's what's happening right now.

We are all engines of karma

[nerdgirl 0]

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The mechanics of the piece are very educational but the sensationalized misrepresentations are what help drive the ignorance and fear which WILL create more of a crisis then is actually the case.

Thanks for the detailed and specific response. I re-viewed it keeping in mind your comments (& others, like [jcd11235]'s). I agree with some of your remarks and some of his, disagree with some, and some I just appreciated hearing.

Part of what I found useful about the video was it minimized normatives and tried to take, what I thought was as close to possible a 'just the facts' approach. Some of the graphics (the exploding bomb metaphor) I agree were sensationalized, like the caricature of the 'sub-prime' family.

For conveying the basic concepts, do you agree that it's A LOT better (orders of magnitude) than the usual recycled "Blame the CRA" rhetoric that gets invoked?

I'd like to see something down similarly w/r/t government policies changes from easing Glass-Steagall to Gramm-Leach-Bliley Act to 1995 Truth in Lending Act. And something w/r/t role and impact of & impact on corporate governance.

/Marg

Act as if everything you do matters, while laughing at yourself for thinking anything you do matters.
Tibetan Buddhist saying

[nerdgirl 0]

Thanks for the primer on the types of paper.
I'm curious what's been the growth in category 4, insurance policies over the last 25 years or so? ROM?

/Marg

Act as if everything you do matters, while laughing at yourself for thinking anything you do matters.
Tibetan Buddhist saying

[Elisha 1]

Quote

Quote

Not bad, but I liked this one better:
http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1&ncl=true

Did you see THIS?

Now I have. Not bad, but mine is more explicit and I think funnier.

[Misternatural 0]

>For conveying the basic concepts, do you agree that it's A LOT better (orders of magnitude) than the usual recycled "Blame the CRA" rhetoric that gets invoked?


Yes, at least this piece was enlightening and I have to remember to take into account that this was a visual arts project and not so much a serious piece of destructive propaganda. I think the author could have been a little more responsible about his depiction of Wall st. before releasing it to the public on You Tube and so on.

The blame game that I witness everywhere is never constructive, subsequently I think it is human nature to desire to seem correct than to actually correct any problems.

I would like to see a piece illustrating how Mark to Market, the Uptick rule and the allowance of extensive short selling of the financials affected the current problem as well.

Thank you for your detailed thought provoking posts, I remain bullish on the future and in particular so called Green tech which is why I am a little sensitive to the constant negativity I have been plastered with for an entire year.

Beware of the collateralizing and monetization of your desires.
D S #3.1415