The Best Cartoon Explanation of a Financial Disaster Created by an Art Student in California. Ever.
If this is the only personal finance blog you read (which means you are either my wife [Hi Honey] or my buddy Rick [Yo Ricky!]) you may not have seen this video yet.
The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.
Amongst the many thousands of blogs that have embedded this admittedly very clever bit of multimedia are some personal finance blogs:
Some Christian PF blogs:
Some non-PF blogs with cool names:
And at least one blog sponsored a major clothing designer:
Kenneth Cole’s Awearness Blog.
The video also has it’s own homepage, with a counter reading over 325,000 hits. They accept donations and sell T-shirts “to deal with a ridiculous bandwidth bill.”
Now, obviously, I would never even think of presuming to dispute the details contained in what is now our nation’s definitive account of the credit crisis. But I do have a few little comments.
Keyed to the video timer:
1:19: The Fed does buy and sell Treasuries to control the money supply, but the outfit that investors usually buy them from is called the US Treasury, hence the name. And Treasury Bills, which are what yielded 1%, were never a way for investors to make more money. They are what is colloquially called “cash.” Gotta love the King Alan graphic.
2:05: That brief period of 1% interest rates (it lasted a year from June ‘03 to June ‘04) certainly made leverage cheaper and made a lot of otherwise marginal deals profitable, but it has not been demonstrated that it caused a quantum leap in the risk taken by Wall Street. Leverage is not “a major way banks make their money” it is, in fact, the very essence and definition of banking. All banks have always been leveraged; it’s what they do for a living. That said, the 100-1 leverage ratio given as an example is extreme and unlikely.
3:43: This strongly implies that mortgage bonds, and the slicing up of pools of mortgages into CDOs, was dreamed up around 2004. On the contrary, the bankers who dreamed this up are long retired now. It became standard practice in the 1980s, as described in Michael Lewis’s entertaining first book Liar’s Poker.
5:03: This is a brilliant graphical representation of how a CDO works, but three slices, or tranches, is fewer than typical. Some pools had as many as ten. Moreover, as good as the graphic is, the viewer is left wondering why it is important, other than as a demonstration of how those wacky bankers make everything too complicated.
There are two nasty side-effects of packaging mortgages into CDOs that are causing problems today. The first is that there is no simple answer to the question “who owns this mortgage?” A homeowner who needs to renegotiate terms has nobody with whom to talk. The other problem is that the mortgage market is very fragmented. There are tens of thousands of mortgage bonds out there, and because each is a particular claim on a particular pool of mortgages, no two are exactly alike. This is a huge problem if, like many Wall Street banks recently, you need to sell a lot of bonds in a hurry.
7:23: As much as I love the sub-prime family graphic, it’s not a fair representation. As the housing bubble inflated, the FICO scores of sub-prime borrowers actually improved substantially. At the peak, the sub-prime borrowers were not irresponsible smokers with four kids, they were relatively trustworthy types who were merely buying more house than they could afford.
8:57: Blaming the bursting of the housing bubble on the mortgage crisis is pretty obviously putting the cart before the horse. There are some nasty vicious cycle effects, but the fuse was lit in the summer of 2006 when house prices started to soften. It took a year for stress in the mortgage market to appear and two years for everything to go boom.
10:18: This gives the impression that what sank the Wall Street banks was that they got stuck with inventory in process when the system halted. That did happen, but it was not their role as manufacturer of mortgage bonds that did them in, so much as their roles as mortgage bond investors and insurers that spelled the end.
Other than that, it really is a very clever video.
Economics, Housing | Frank Curmudgeon | 
March 5, 2009 12:49 pm
14 Comments
Other Links to this Post
RSS feed for comments on this post. TrackBack URI
Subscribe
By SJ, March 5, 2009 @ 2:40 pm
Nice comments/analysis of the video!
Personally, I like 5:03, the idea of slicing the mortgage up so no one knows who owns it…
Goes back to my really old idea of selling stocks on people’s lives lol…
By Buddy Rick, March 5, 2009 @ 5:33 pm
Yo! Frank….
Check out this cruder verson of your video.
Caution….PG-13 Words used here
http://docs.google.com/TeamPresent?revision=_latest&fs=true&docID=ddv7hj34_03774hsc7&skipauth=true&ncl=true
By Manshu, March 15, 2009 @ 6:48 pm
Awesome, great explanation. Very easy to understand. I like the fact that you took the trouble to explain the part about the family, I thought it was a bit harsh too.
By chapter 7 attorney, February 1, 2011 @ 4:18 am
This video is wild. Such complicated ideas made so simple. I may put a link to this on my site. Strong effort Mr. Jarvis. Thank you for sharing the embedded video.
By Professor Lembach, March 11, 2011 @ 4:25 am
This video, and it appears, this whole blog, are continuing, perhaps unconsciously, to perpetuate an enormous lie: if you have a mortgage, you are NOT a homeowner. You’ve entered into a contract to buy a piece of real estate from a bank, in installments over time. Until the contract is fulfilled, YOU OWN NOTHING.
I don’t mean to yell, but this vital information that seems to be routinely ignored
By hcg diet plan canada reviews, August 15, 2012 @ 1:28 pm
Thanks for finally writing about >The Best Cartoon Explanation of a Financial Disaster Created by an Art Student in California. Ever. | Bad Money Advice <Loved it!
By Angeles, October 5, 2012 @ 9:02 pm
I love what you guys are usually up too. This kind of clever work and reporting!
Keep up the good works guys I’ve you guys to my personal blogroll.
By Tanesha, December 7, 2012 @ 6:24 am
I very much enjoyed looking through your blog posts and will come back again when I can.
As I believe you and your readers might be interested, please visit http://www.
SecretPokerBonus.co.uk when you can. It details all
the best bonuses being offered from the leading Poker
websites, like Virgin, Gala and Winner.
By tx, January 27, 2013 @ 8:41 am
I quite like looking through a post that will make
people think. Also, thanks for allowing for me to comment!
By bad credit buy a car, February 14, 2013 @ 4:58 am
It is the best time to make some plans for the future and it’s time to be happy. I have read this post and if I could I desire to suggest you few interesting things or tips. Maybe you can write next articles referring to this article. I desire to read more things about it!
By large kitchen islands with seating for sale, March 29, 2013 @ 8:06 pm
Greetings! I’ve been reading your web site for a long time now and finally got the courage to go ahead and give you a shout out from Austin Tx! Just wanted to mention keep up the good job!
By green coffee diet pills, April 21, 2013 @ 12:48 am
Hey there would you mind letting me know which webhost
you’re working with? I’ve loaded your blog in
3 different internet browsers and I must say this blog
loads a lot quicker then most. Can you recommend a good hosting provider at a honest price?
Thank you, I appreciate it!
By teeth whitening, April 24, 2013 @ 4:22 am
Hey there! This is my first comment here so I just wanted to give a quick shout
out and tell you I really enjoy reading through your
posts. Can you suggest any other blogs/websites/forums
that go over the same subjects? Thanks for your time!
By garcinia indica tree, May 14, 2013 @ 10:02 pm
Heya this is kind of of off topic but I was wondering if blogs use WYSIWYG editors or if
you have to manually code with HTML. I’m starting a blog soon but have no coding expertise so I wanted to get advice from someone with experience. Any help would be greatly appreciated!