A Visual Guide to the Financial Crisis

These diagrams are about as good as it gets!

Thanks for the hard work.

This falls right in line with something else I was reading today in Portfolio: http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom

Wow, what great images! I think I actually understand the causes of the crisis now!

Very sweet visualizations

Rather interesting to note this flow diagram from the start. Undoubtedly, it’s still government bailout.

Excellent analysis – makes it easier to understand for sure. I love how the President really only chimes in when it’s absolutely too late to really curb it.

Great diagrams. What about the credit default swaps?

I like the last speech bubble

Thanks for the hard work!

Very nice illustration…

This is one of those times I can really say “Pictures speak louder than words.” Good work Mint.

These diagrams are awesome!

One thing though, one of the “bottlenecks” is “Overbuilding of homes” and the rest of the bottom diagram relies on that.

That might be true in the US, but property prices are going down sharply here in the UK too but overbuilding did not occur. In fact, it was a major lack of building due to strict planning laws that caused the property price rises in the first place. As recently as three months ago, the British government was banging on about how we need to keep building more homes to satisfy demand.

It seems, however, that demand to own a home has now slumped not because people don’t want to own one, but because people are scared of the risk involved – so they’ll live with their extended family / parents / whatever for longer yet instead.

Meanwhile, the strength of the dollar eroded through the “get into trouble” phase of this (loose money supply and a lot of debt tends to do that) and has gotten much stronger since the bailout package was passed. We’re talking about 3 year strong highs against the Euro and 5+ year strengths against the GBP.

Money supply down, but purch power is up. I wonder how bad the economy really is now that the housing bubble has mostly popped and forced the US into a more rational monetary policy.

This ranks up there with the stick-figure slide presentation explaining how the CDOs were created and gamed (http://docs.google.com/TeamPresent?revision=_latest&fs=true&docID=ddv7hj34_03774hsc7&skipauth=true). Nice work.

Just one minor issue: CDOs don’t only contain bad loans. That’s the whole point. They consist of mortgages bucketed into risk tranches, which are then sold at various prices. The problem is that risk is relative and if the whole economy sours, even those who look relatively likely to payback will probably default.

I realize that you probably had to be reductive for explanatory purposes, but still.

People bought the wrong way in the wrong markets. I used “equity” from my house during the last in South Florida to buy 10 other houses in upstate NY. I’ve lost $0 equity on the investments and could care less about the equity on the house in Florida. Rents pay the carrying costs and provide healthy positive cash flow. Now that things are low, I’m surviving because I put the equity “overflow” in the healthy assets.

You missed one key step – Federal Reserve “pumping up” the markets with cash injections and lowered interest rates, contributing to the bubble growth. Ah, easy money.

You forgot President Clinton appointing Franklin Raines,lowering the requirements to qualify for mortgage loansand the cooking of the books at freddie mac.
Look who recieved the most “campaign contributions” from freddie mac to look the other way while our economy was raped.
It’s ok though,the very people who profited are going to fix it now.

Excellent graphic easy to understand. Neither the graphic nor commentators picked up on a very important issue. That is the cost and financing of the Iraq war and the effect it had on the then rising price of oil and it’s subsequent impact on the overall economy and housing market
By borrowing the money to finance the war and pay for the Bush tax cuts to the wealthiest 5 percent of Americans the increased pressure on the dollar drove it downwards vs the Euro and major Asian currencies. Oil markets seeing the falling value of the dollar eroding their real income raised prices to compensate. Oil went from 29 dollars per barrel when Bush came to office to over 140 dollars per barrel before falling back in the current downturn. This put huge pressure on every facet of the economy from corporations to single families to students. In simplistic terms this did three things that contributed to the housing and credit crisis.

1. The rising cost of oil contributed to the rising cost of production and transportation of everything. From fertilizer, storage, transportation, processing and packaging of agricultural products to mining, processing, transportation, fabrication, packaging shipping, warehousing and distribution of the end product. In industries where applicable the industry and accompanying jobs were shipped overseas to lower labor cost countries , China for example. When that wasn’t a feasible option producers tried to lower cost by trimming the workforce or not hiring new employees. The net result for the economy overall was a net loss or stagnation of jobs and higher prices for everything that used or relied oil or energy created from oil products. The most visible manifestation was the 4+ dollar a gallon gasoline, however the less visible cost were just as damaging if not more so to the economy.

2.The increased cost of goods and services for the consumer compounded with a stagnant or net loss of income and purchasing power forced more and more people to rely on credit cards for day to day purchases. This meant that consumer debt skyrocketed and personal savings plunged during this period. As the economy got deeper into this cycle consumers were finding harder to cover all of their obligations of mortgage payments, credit card debt, and rising transportation, food, utilities and heating bills. For those that lost their good paying factory jobs finding new jobs with similar or even adequate compensation became more and more an exercise in frustration. These two scenarios contributed to above nominal delinquency rates on mortgages. Mortgages were hit first because they tend to be the largest indivisible non-negotiable cash obligation that consumers have(Have you ever tried renegotiating your payment terms with a bank?). The next wave of defaults will be credit card debt and this is starting to rear it’s menacing head now.

3.The SUV rage and housing construction boom led to more people in larger gas guzzling vehicles driving more often and longer distances leading to substantially increased gasoline consumption and importation. This coupled with the higher price of oil products, and an increase in the percentage of total oil consumption imported meant that on the average the U.S. was sending approximately $800 billion out of the country each year to pay for gasoline and petroleum products. While this figures varies from source to source it is never less than $600 billion per year which since the start of the Iraq war in 2003. This is $3.3 to 4.4 trillion taken out of our economy in five and a half years. On top of that is the $10+ billion dollars per month direct cost of the Iraq war and the growing Federal budget deficit. Of that $3.3 to 4.4 trillion at least 70% should have stayed in the U.S., oil is not free and some moderate price increase was to be expected but not the five-hundred percent increase through the summer of 2008. Had that $2.3 to 3.1 trillion stayed in our economy it would have manifested itself in reduced credit card debt, increased savings and generally circulated through the economy and banks providing cash liquidity. It is the lack of this cash liquidity in the private sector that necessitated the government intervention.

These factors combined to push up the mortgage default rate higher than what it would have been had oil prices not gone through the roof.

chris russell is right. The only mention of Fannie Mae and Freddie Mac in these diagrams is when they were bailed out by the government. Yet they played a significant role as the largest “guarantor” of all these bad loans that were being made, hence their need for the government bailout. Why isn’t the role they played more accurately captured here? Not to mention the failure of oversight for these government backed institutuions by the very politicians who were responsible for doing so (B. Frank, C. Dodd., et al.).

Great visual. Nice Presentation.

Really like your site, the use of the flow diags is very powerful and makes it much easier to understand

What software did you use to make this chart?

awesome..
awesome..
awesome..

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privatization of profits and the socialization of losses.

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near the top of the graphic, couldn’t you changed “historically low interest rates” to “artificially low interest rates?”

This is what Ron Paul always addresses. He makes a lot of sense.