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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.
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: