**Topics::** [[Finance]] [[Economics]] [[Monetary Policy]]
I had recently stumbled upon [this video](https://www.youtube.com/embed/U1dpWiZoiJU) that stitches together the [[great recession of 2008]] to the crisis we are experiencing now. It's a great video, and I recommend watching it in its entirety.
One thing I found super fun to build was a map of the root causes and effects stemming from 20 years ago all the way to today, and I wanted to share it here in case it helps anyone make sense of the mess. [Here's](2022-11-08-cause-and-effect-financial-crisis.png) an image version if you would like one.
```mermaid
flowchart TD
classDef root fill:#f66;
classDef effect fill:lightblue;
classDef speculation fill:lightgreen,stroke:dash;
PEP --> HPK
GSA[[1999, Repeal of Glass-Steagall Act]]:::root --> BRI[Banks could start taking risky\ninvestments on their own balance sheet]
GSA --> IBI
S11[[2001, Sep 11 Attacks and\nEnron Scandals]]:::root --> LCC[Low consumer confidence] --> FLR[Fed lowering rates\nto 1% from 7%] --> PEP
PEP[Period of economic prosperity] --> HON[Everyone who could\nown a home already did]
HPK[Home prices kept going up] --> SPM
HON --> SPM[Mortgage lenders started\nissuing adjustable rate\nsub-prime mortgages]
SPM --> ORM[Mortgages needed to offload\nrisky mortgages]
FLR --> FLY[Funds looking for\nhigh yield investments]
FLY --> CDO[CDOs, amalgamation of\n debt divided into tranches, were created]
ORM --> CDO
CRP[Credit rating profits\nhad perverse incentives] --> CRA
IBI[Investment banks\nhad perverse incentives,\n no penalty for creating risk] --> CDO
IBI --> FOR[Banks would\nforum shop for credit rating agencies] --> CRP
CRA[Credit Rating Agencies rated as AAA] --> CDO
FGE --> AVO[Avoided calling CDSes insurance,\nas they would not be regulated] --> CDS
FGE[Geniuses were hired to create\nincreasingly complex products]
CDS[Mortgage credit default swap or CDS,\ninsurance for failed mortgages,\nwere created]
CDO --> CDI[CDOs exploded in\nadoption]
CDI --> BCDS[Banks continued betting and hedging on\nmortgages and CDOs using CDS]
CDS --> BCDS
BRI --> BLA[Banks could take on even more risk] --> BCDS
SEC[[2004, SEC relaxed liquidity requirements\nof 5 biggest banks]]:::root --> BLA
BCDS --> BLI[Bank Liabilities\nexploded]
ERE[[2004, economy recovered]]:::root --> FRR[Fed raises rates]
FRR --> SPU[Sub-prime mortgages\nstarted to default]
SPM --> SPU
SPU --> SPL[Sub-prime lenders\nstarted to go bankrupt]
BLI --> BBS[[2008, Bank balance sheets\nwere in trouble]]:::root
SPL --> CDD[No one wanted to buy\nthe CDOs anymore] --> VM[Value of real estate investments\nplummeted] --> BBS
BBS --> BSD[Bear Stearns goes bankrupt] --> JPM[JPM bought Bear Stearns at a 98% discount] --> BSF
BBS --> LBD[Lehman Brothers goes bankrupt due to\n 30x leverage on real estate, hidden by\n accounting gimmicks] --> BSF
BBS --> GSM[Goldman Sachs and Morgan Stanley bet against\nthe instruments they were still selling to save themselves] --> BSF
BBS --> ML[Merill-Lynch merges with\nBank of America to save themselves] --> BSF
BSF[Banking system was frozen,\n no one would lend anything] --> FL[Firms like GE can't get even short-term credit,\n wages were not paid]
BBS --> BOS[[2008, bailouts started,\nUSD2.5T]]:::root --> AIG[Federal Reserve buys AIG,\n because it was deemed too big to fail]
FL --> BOS --> DTI[Distrust in institutions] --> BTC[[Bitcoin was created]]:::effect
DTI --> OWS[[Occupy Wall Street started]]:::effect
BOS --> LTB[Loans to large banks to\nconsolidate and buy up smaller banks]
BSF --> ICE[Iceland government is in financial trouble\ndue to bank bailouts] --> EUR
BSF --> GRC[Greece is in financial trouble] --> EUR
BSF --> UK[UK had to bailout its banking system] --> EUR
EUR[[Eurozone Debt Crisis\nGreece, Ireland, Portugal, Spain Italy]]:::effect
BSF --> UN[[6 million unemployed in the US]]:::effect --> DFA
DTI --> DFA[[Dodd-Frank Act]]:::effect --> DS[Did not seem to work] --> BCSO
BCSO[Bespoke Collateralized Synthetic Obligations\non Corporate Debt] --> CS[Systemic corporate debt effect?\n Hopefully not]:::speculation
UN --> REAL[[Real GDP per capita has never recovered since 2008\nA whole generation was poorer than their parents]]:::effect
EUR --> REAL --> CBR[Central banks kept lowering interest rates]
CBR --> INT[Cheap interest rates became the norm]
REAL --> PROD[Productivity of labor has not increased since 2008]
COVID[[2020, COVID-19 Pandemic]]:::root --> MP[Further monetary stimulus\nvia asset purchases]
MP --> SM[Stock market has been going up] --> INF
MP --> NFT[Investments in risky assets such as NFTs] --> INF
COVID --> PRD[Supply chain disruptions]
MP --> INF[[Inflation]]:::effect
PRD --> INF
INF --> CBR2[Central banks raise interest rates]
CBR2 --> DMD[Demand for everything reduced]
DMD --> REC[[2022, Another Recession!]]:::speculation
INT --> REC
PROD --> REC
INT --> VRM[Lots of variable rate mortgages\nsnapping to market rates soon\nin Australia, UK, EU] --> REC
CBR2 --> BNK
INT --> BNK[Credit Suisse is in trouble\nwith their debt] --> REC
```
Here's the original video embedded in case you want to watch the whole video:
<div class="resize"><iframe width="800" height="450" src="https://www.youtube.com/embed/U1dpWiZoiJU" title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe></div>