This is a space to place thoughts that would look too out of place on the regular blog. Unfinished thoughts, initial takes, and personal posts are placed here.
How the 2008 Financial Crisis Still Affects Us
Stitching together the threads of the 2008 financial crisis, and how it still affects us today.
Author
TJ Palanca
Published
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.
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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:
