**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>