This is a pretty good visual analysis of the credit crisis... its 10 minues long, but it explains everything better than anything else I've seen:
Like playing hot-potato with a timebomb... Overall, this is very good, but it is missing answers to the following:
- What amount of leverage did banks have in the past? The 100-to-1 ratio of credit-to-cash is a bit of an exaggeration... Investment banks and lending banks used to be legally separate entities. Lending banks were careful with cash (10-to-1 leverage), investment banks were free-wheelers (30-to-1 leverage). When Clinton repealed the requirement that they be separate, dangerous levels of leverage were inevitable... but it never got as bad as 100-to-1.
- Why don't people understand that homes are HORRIBLE investments? The common wisdom that being a homeowner was a good idea only worked because of the demographic shift of the baby boomer generation. Suddenly there were a bunch of well-off families that wanted a home, and demand exceeded supply. This drove prices up, and fooled people into thinking that home ownership was a good investment. Home ownership in America will never be that great of an idea... unles we all have tons of kids, we import a lot of immigrants, or your local area has an equivalent demographic shift of new people.
- Why did Greenspan steadfastly refuse to raise interest rates, when the economy was clearly overheated? He himself said Wall street demand for bad mortgages drove the financial crisis... He could have stopped all of this if he raised interest rates in 2004. Why did Greenspan do absolutely nothing useful when he was in charge? A bowl of soup would have done a better job...
- Where were the credit ratings agencies in all this? The only reason sane investors purchased these crappy bundles of sub-prime mortgages was because folks like Moody's and S&P claimed sub-prime mortgages were "safe." If it weren't for the idiotic ratings agency, everybody would know it was a time bomb, there wouldn't be much demand for them, and we wouldn't be in this mess. These folks should be fired, and legally barred from from doing any job that requires math.
- What is the size of the "credit default swap" market? The last estimate was about $44 trillion dollars: more than all the money in the world! The only reason Wall Street used such odd terms was because if they called it "insurance," then it would be regulated. Some government official would have audited their books years ago, and said "hang on a minute, you don't have enough cash to repay your obligations if something REALLY bad happens. You can't sell this anymore!" In effect, folks like AIG made "promises" to repay people if their stock market investments lost value... but naturally, AIG didn't have $44 trillion dollars in cash to cover all their promises... selling insurance when you cannot pay claims is FRAUD, thus every executive at AIG belongs in jail.
- Finally... why do all sub-prime mortgage owners smoker cigarettes???