The Crisis of Credit Visualized - a simple yet effective description of the current crisis | Hacker News Reader

The Crisis of Credit Visualized - a simple yet effective description of the current crisis

crisisofcredit.com

66 pointsfiaz15 comments

Very cool, but the Bomb visualization fails to explain an important fact. The investment bankers aren't receiving cash from the homeowners, but those assets (houses) are not worthless.

Given time (in this case a bailout) those houses should return to normal value via demand once they've gone low enough for people to want to buy them again. At least that's the hope.

Yes, but do remember most of these houses were bought during a bubble period. I doubt many houses will ever reach the value that they were bought at.

Especially if you've read "how the crash will reshape America" recently posted on HN (http://news.ycombinator.com/item?id=485036), you'll realize that many places where economic growth was fueled solely by home value will never fully recover (Arizona, Las Vegas, etc).

Amazing video. I wish he had a second video to explain how exactly the government is trying to fix the problem.

Maybe that could be represented as a giant firehose of money fueled by the giant firetruck of taxpayers, which in turn is used to put out the fire in the banks and the fuses on the bombs.

Either way, amazing video.

Bankers are leveraged. It doesn't matter if the house went down 40% or 100% - they are broke and out of business either way.

I am not an expert on this. However, it's probably worth mentioning here what I've understood from economists: the banks are not nearly as broke as they say they are -- the ones that are still in business, anyway. If they were really that broke, they wouldn't have taken the TARP money to buy out competitors and give upper management the fat bonuses. The banks that are going out of business ... well, they aren't, really. They're being bought out (e.g. WaMu) and the assets are now held by the parent bank. In that light, I think the original commenter's point stands; the houses aren't worthless.

What's normal value?

The 1997 prices: http://en.wikipedia.org/wiki/File:Case-shiller-index-values....

The visualization mentions credit default swaps, but then doesn't show how those, too, contributed to the cycle as all the investments were being unwound. My somewhat primitive understanding is that since the 'safe' tranche of the CDOs was 'insured' via a CDS, when the defaults actually happened, the banks had to pay back not only the amount they had borrowed, but also an additional CDS payout. This contributed to the bankruptcies too, I think.

The CDS were underwritten by other large financial institutions for relatively cheap premiums. These institutions thought that "safe" assets will never go out of money so the insured event will never occur.

CDS is the reason AIG went bust. It gets trickier, they did not go busting having to make make payments for the CDSes that they had written but the likelihood of them having to pay increased in light of increased defaults, so the rating agencies cut the rating of AIG. Now, whenever CDS or similar derivatives are written they are done looking at the ratings of the parties involved and with caveats that any fall in ratings would translate into the parties making additional margin payments (money to safeguard against parties defaulting); getting back to the AIG story, when the ratings fell, they were obligated to pay additional margin money to the tune of billions.. which they did not have.

A small facet of the big big story.

Credit default swaps are a way for large financial institutions to pass risk of defaults along, you might have heard "spread the risk around", by getting their risk insured by other big firms. Those firms in turn do the same thing, and everyone was happy because it created lower risk and made loans easier to get. In theory.

In practice this chain of risk management snapped when one company defaulted on their insurance of the risk and the whole thing came crashing down.

Amazing visualization. Taught me something even though I thought I understood what was happening!

Great visualization, really clarifies it.

FYI, the copy on Vimeo loaded much faster for me: http://www.vimeo.com/3261363

YES!!! Finally an explanation from a non-economist that doesn't descend into progressive-populist-bankers-are-evil propaganda.

And yes, a second video showing the actions of the government would be nice.

Actually, I think this video legitimizes that view. What else would you call using other people's money to bet that you can hand off the time bomb to some sucker before it explodes?

It is an illustration that many people only concentrate on ideas when the ideas are spoken with perky voices combined with snappy graphics. The video had less substance than any of the reasonable essays on the subject out there.

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