A Visual Guide to the Financial Crisis

Posted on 11. Dec, 2008 by admin in charts and graphs, economics, government

You may have seen this around. It’s some client work I did for mint.com, originally posted here. This financial crisis is quite difficult to pin down because there are many factors involved, chain reactions, and negligence abound. So I created this primer to help people get their heads around it. It is a loose flow chart and fairly simple. Each item could have been split into many sub-items but I didn’t want to lose people along the way.

P.S. The last chance to get a free Death and Taxes poster by Christmas coming up. See here for details. Support your local make-cool-things-with-data guy. Thanks!

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Tags: bailout, client work, economy, flow chart

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23 Comments

Udo, December 15, 2008:

Great illustrations about the financial crisis. Would be great to have this as a slide show to be used in college.
Udo, December 15, 2008:

And I wanted to add that this is superbly explained in ‘The Giant Pool of Money’ with Ira Glass from NPR.
Check this out and listen. I listened and read the transcript to grasp the biggest fraud in history.
http://www.thislife.org/Radio_Episode.aspx?sched=1242
The budget deficit will pale compared to this giant rip-off.
Nat, December 15, 2008:

Great graphic, as always! As a nitpicky issue, “overcapitalization” is misspelled towards the end of the first section.
Robanne Harrison, January 4, 2009:

When will the Visual Guides to the Financial Crisis be available in poster or powerpoint formats. I teach economics and I could sure use them in class this semester!!
Phil Cantor, January 6, 2009:

Great work.

Now, if you could just do a graphic that shows all the steps required to get the economy on track toward real sustainability and send it to the Obama team.
Gerald Littlejohn, January 16, 2009:

So who is going to Jail for the fraudulent creation of CDO and the AAA BBB ratings applied to them. The regulators or the creators or the sellers. Indeed are the buyers (guys running my bank and pension funds) standing up for blame in terms of mismangement and failure of duty?
Yale, January 16, 2009:

Very nice … ditto to comment from GL. The actions of the rating agencies and their impact do not get enough attention. How did the the banks “secure … ratings” that resulted in the perception of “safe” investments?
Uskas, January 18, 2009:

Great illustrations about the past / current financial crisis. Would be great to have the next step… What will come next ?
Francois Gregory, January 21, 2009:

It’s time for white-collar crimes of this magnitude to be punishable in a manner up to or including the death penalty(if you believe in it). I’m serious. The level of destruction doesn’t compare to a murder in a bank heist or a train derailment.
albert, February 26, 2009:

very nice! is it possible to embed this in my website. if so, please provide me the code

thanks
kengpdx, March 1, 2009:

thanks….nice work!
Peter Z, March 2, 2009:

Very nice. Yeah – those AAA ratings are one of many problems. Made the risk of default look too low. Well it would have been okay if AIG actually priced it’s backing of the debt correctly AND also kept money to pay in the event of default – like most insurance companies have to do.
Crysis, March 5, 2009:

Funny thing. I saw this exact same explanation in video format in YouTube.com a few days ago. I guess the video owner constructed it through the steps in this illustration. Anyway, very nice explained.
Alec Epting, March 8, 2009:

Great visuals. You need to include several other things: 1) presidential pressure for Fannie Mae and Freddie Mac to loosen lending requirements as a way to broaden home ownership; 2) FASB 157 mark-to-market accounting which greatly undervalues CDO’s; 3) repeal of Glass-Steagall Act which had prevented banks from engaging in investment banking; 4) SEC lifting leverage restrictions on investment banking
sami, April 5, 2009:

Good work and explanation…. It’s amazing how people blind themselves and try to keep their dreams alive even when all of the evidences say the contrary.
Eugene, May 11, 2009:

A great piece of work….thank you!
Scott, September 13, 2009:

While the housing market may have played the biggest role in the downfall of the economy, it was by far not the only reason. Had other factors not played a role, the economy would not be in the dire position it is right now.

What’s even sadder is the way to fix the economy is within everybody’s ability. The reason for the economy to stay down is taught in Macro-Economics 101 classes. Personal spending. If folks would stop with the hording of money, and remove the fear of spending the economy would come back quickly and strongly. The lack of spending is keeping our economy down, and causing inflation to take a major jump. Proper spending improves the economy and reduces inflation.

So, what are YOU going to do?
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John Tierney, September 24, 2011:

Listening to the various economic experts it seems we are heading for an economic Armageddon that will make the fall of Lehman Brothers seem like the liquidation of a small corner shop. With this doomsday in mind lets take a look on how bad Europe’s position really is. Some of the more pessimistic commentators would have us believe it could take generations to sort out.

So really how bad and broken is Europe?

First let us put some basic facts on the board. The eurozone has a GDP of about €11 trillion. Its debt to GDP ratio is about 85%. This leaves a debt pile of €9.35 trillion. This includes all eurozone debts even Greece,Portugal,Spain, Ireland everyone. Also when banks say they are re-capitalised all this means they have increased the capital retained to be held in reserve should any of its loans run into trouble. The big problem is the ratio of loans/capital that exists today is not nearly enough to supply the market with the demand for loans. This is why many business’s are stagnating. They have no access to their capital requirements.

Some countries like Greece, Italy, Spain Portugal and Ireland find this level of debt unsustainable. The question we have to ask is how much would be needed to achieve a debt level that is sustainable for those countries that are feeling the pressure.

Europe needs to send a clear and bold message to the markets, and a meaningful cut in the above ratio would be a clear signal. The question is by how much and by what methods we can achieve this. The Eurocratic’s solution would be to cut as little as possible and hope for the best. This is no longer good enough. The markets will see it as just another exercise at kicking the can down the road again. A good idea is to fix it to something tangible, something that has been previously agreed by everyone. Something like the levels agreed by the Mastrict treaty. The countries that signed up to this treaty agreed that the maximum level of debt to GDP should be no more than 60%. A quick calculation using this as a guide would give a new eurozone debt of €6.6 trillion. When subtracted from the current amount it leaves a difference of €2.75 trillion. This is the amount of debt that needs to be addressed. This is the real elephant in the room. Rember this figure €2.75 trillion.

Now the question arises how to ‘de leverage’ to 60%. The first problem is of course that in some countries its more than 60% and in some less than 60% so to get agreement of everyone will be nearly imposable. Tax payers in wealthier countries are understandably reluctant to provide more capital to what they see as indisciplined countries.

Clearly the only way that can achieve the most agreement is for the ECB to engage in quantitative easing. There is two ways to do this. The first is by physically printing the cash. The second, which would In my humble opinion be best. This involves the ECB doing this by directly injecting capital into European banks, or into European central banks, and they can distribute the funds to their own banks. There is no printing necessary as it all can be done electrically.

When this task is completed we will have a debt to GDP ratio of 60%. We also will have banks recapitalised by €2.75 trillion. This should easily save any banks with liquidity problems. It also will lead to the emerging of banks who now have the required funds to resume lending, and act like a bank should. True we will have an extra €2.75 trillion created and the Germans & Fins etc could freak out over risks of Inflation. But the advantage of this course of action is that the only way this money will enter the system and into consumers pockets is by the issuing of new loans and mortgages etc. The way the supply of new loans has dried up in Europe makes it imposable for businesses to be created and expanded, imposable for people to buy a home, and is one of the reasons why throughout Europe unemployment is so high. These revitalised banks will be capable of lending to business so they can create and increase employment .It would also provide funding for new and existing mortgages, which could restart the property market and create jobs which this labour intensive industry does very well.

I think it is a chance well worth taking. There are many more upsides than downsides in taking this path. Even if there is an increase in inflation the rise would be modest, and may I say welcome as it will help to inflate away the still high level of remaining debt.

But most of all it would send a powerful message to the rest of the world that Europe has grown up and is more than capable of dealing with its own problems.
Jackson Bayerl, October 14, 2011:

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