Before:
Summary of
Crisis of Credit visualized
John Jarvis’s video Crisis of Credit visualized presents the origin of
the credit crisis and its effects.
It started due to the 9/11 dot.com that caused 1%
interest rates. The investors refused to buy treasury bills from the Federal
Reserve and looked for other options while banks could cheaply borrow money.
This caused them to expand due to leverage.
Because of investment interest, the banks decided to
link the investors to the homeowners by selling mortgages. A house-wanting
family would contact a broker, who contacted a lender. They bought a housing
mortgage, which the lender sold to an investment banker. The banks then
organized their mortgages into safe, okay and risky slices called collateral
debt obligation. They sold them to other investors. If homeowners defaulted on
their debt, the investor got the house; it was profitable due to rising prices.
The turnaround came when lenders started giving
mortgages to irresponsible homeowners who defaulted on their debt. More houses
became vacant, which caused housing prices to drop, ending in investors owning
worthless houses. They refused to buy more mortgages, which cause the economy
to freeze and result in bankruptcy. Homeowner investment plummeted too, leading
to a collapse of the economic system.
After
Summary of
Crisis of Credit visualized
Jonathan Jarvis’s video “Crisis of Credit Visualized” presents the
origin of the credit crisis and its effects.
It started due to the 9/11 and dot.com that caused 1%
interest rates. Those were passed to keep the economy strong. Investors refused
to buy treasury bills from the Federal Reserve and looked for other options
while banks could cheaply borrow money. This caused them to expand due to
leverage.
Because of investment interest, the banks decided to
link investors to homeowners by selling mortgages. A family seeking a house would
contact a broker, who contacted a lender. They bought a house using a mortgage,
which the lender sold to an investment banker. The banks then organized their
mortgages into safe, okay and risky slices called Collateral Debt Obligations.
They sold them to other investors. If homeowners defaulted on their debt, the
investor got the house; which was also profitable due to rising prices.
The turnaround came when lenders started giving
mortgages to irresponsible homeowners who defaulted on their debt. More houses
became vacant, which caused housing prices to drop, ending in investors owning
worthless houses. They refused to buy more mortgages, which caused the economy
to freeze and result in bankruptcy. Homeowner investment plummeted too, leading
to a collapse of the economic system.
