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How the 2008 Financial Crisis Still Affects Us

Stitching together the threads of the 2008 financial crisis, and how it still affects us today.

TJ Palanca


November 8, 2022

I had recently stumbled upon this video 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 an image version if you would like one.

  init: {
    "fontFamily": "IBM Plex Sans, sans-serif;",
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: