That should probably be “epilogue”…

This clip places all of the blame for those darned sub-prime mortgages on those greedy investors, yet somehow fails to ever mention the culpability of the US Congress, which for years forced irrational lending standards on lenders by the Community Reinvestment Act (CRA).

According to this Forbes column from last 18 July by Yaron Brook ( http://www.forbes.com/2008/07/18/fannie-freddie-regulation-oped-cx_yb_0718brook.html ):

“The CRA forces banks to make loans in poor communities, loans that banks may otherwise reject as financially unsound. Under the CRA, banks must convince a set of bureaucracies that they are not engaging in discrimination, a charge that the act encourages any CRA-recognized community group to bring forward. Otherwise, any merger or expansion the banks attempt will likely be denied. But what counts as discrimination?

“According to one enforcement agency, ‘discrimination exists when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants.’ Note that these ‘arbitrary or outdated criteria’ include most of the essentials of responsible lending: income level, income verification, credit history and savings history — the very factors lenders are now being criticized for ignoring.

“The government has promoted bad loans not just through the stick of the CRA but through the carrot of Fannie Mae and Freddie Mac, which purchase, securitize and guarantee loans made by lenders and whose debt is itself implicitly guaranteed by the federal government. This setup created an easy, artificial profit opportunity for lenders to wrap up bundles of subprime loans and sell them to a government-backed buyer whose primary mandate was to ‘promote homeownership,’ not to apply sound lending standards.

“Of course, lenders not only sold billions of dollars in suspect loans to Fannie Mae and Freddie Mac, contributing to their present debacle, they also retained some subprime loans themselves and sold others to Wall Street — leading to the huge banking losses we have been witnessing for months. Is this, then, a free market failure? Again, no.

“In a free market, lending large amounts of money to low-income, low-credit borrowers with no down payment would quickly prove disastrous. But the Federal Reserve Board’s inflationary policy of artificially low interest rates made investing in subprime loans extraordinarily profitable. Subprime borrowers who would normally not be able to pay off their expensive houses could do so, thanks to payments that plummeted along with Fed rates. And the inflationary housing boom meant homeowners rarely defaulted; so long as housing prices went up, even the worst-credit borrowers could always sell or refinance.

“Thus, Fed policy turned dubious investments into fabulous successes. Bankers who made the deals lured investors and were showered with bonuses. Concerns about the possibility of mass defaults and foreclosures were assuaged by an administration whose president declared: ‘We want everybody in America to own their own home.’

“Further promoting a sense of security, every major financial institution in America — both commercial banks and investment banks — was implicitly protected by the quasi-official policy of ‘too big to fail.’ The ‘too big to fail’ doctrine holds that, when they risk insolvency, large financial institutions (like Countrywide or Bear Stearns) must be bailed out through a network of government bodies including the Federal Deposit Insurance Corporation, the Federal Home Loan Banks and the Federal Reserve.

“All of these government factors contributed to creating a situation in which millions of people were buying homes they could not afford, in which the participants experienced the illusion of prosperity, in which billions upon billions of dollars were going into bad investments. Eventually the bubble burst; the rest is history.”

Once again the Fed is doing such wonders for US. “Hello, I’m from the government and I’m here to help.”

When will our theoretically educated leaders who have access to any conceivable information learn that government interference in free markets can only interfere with its free citizens making free choices? Apparently never.

Sub prime borrowers are overweight, smoke, drink and have more children.

Yep.

Good animation.

However one question:

Why are the investment banks also affected (as soon as the foreclosures rise and the income stream dries up)? They, being the middlemen, just pass on the risk and thus should leave them with zero risk (and making their profits on the sales commissions).

What is wrong with my argument?

GJ

GJ,

I believe that the problems for the invesmtent banks were largely related to not being able to unload their inventory when the ***t hit the fan.

Someone should make something this to explain the Austrian business cycle theory. Does anyone know if they have?

This animation is extremely well made! Fantastic! Is there a Hollywood for this niche of films too?

But its message is boulderdash…

It misses the crucial point that it was the politicians who decided about the “1% interest rate”. Politicians deliberately engineered this crises because they always wanted to win the home omwers vote in the next election. Politicians created the myth that “house prices always rise” as an election campaign slogan.

Also, the politicians wanted “1% interest rate” in order to be able to create/borrow more money for their pet projects (such as burocracy and wars far away). Politicians ALWAYS want 1% interest rate. The only thing they want more is 0% interest rate (like the muslims, actually…)

The bottom line of the animation seems to be that “shit like this happens” spontaneously on free markets. But IT DOESN’T, because on free markets the FED wouldn’t exist and interest rates would react to supply and demand of investors and borrowers, not to political orders.

The animation works well as a dictionary for a couple of “difficult words”. But it does nothing at all in order to explain the credit crisis.
Au contrair, I’m afraid!

This is purely Regulation, Deregulation, and, likely, government invention allowing Moral Hazard leading to excess and unbridled GREED. (Why not, the Government would bail you out when over your head).

Here’s just some of the examples:

Reportedly, this same credit derivative issues caused the Panic of 1907: a near collapse of the U.S. Financial Sector.

Federal Reserve Act of 1913.

Glass-Steagall Act of 1933 prohibited banks from offering investment, commercial banking, and insurance services.

The Monetary Control Act of 1980 deregulated Banks and, among others, allowed Banks to vary customer interest rates.

The Shad-Johnson Agreement, formalized by legislation in 1982, gave the CFTC regulatory jurisdiction over futures trading while the SEC was given regulatory authority over options trading.

The Gramm-Leach-Bliley Financial Services Modernization Act was enacted in 1999 and repealed part of the Glass-Steagall Act.

Credit Default Swaps were invented in 1997 and became exempt from regulation with the Commodity Futures Modernization Act of 2000, which was also responsible for the Enron loophole. The Act was rushed through Congress the last day before the Christmas holiday and there were neither hearings nor opportunities for recorded committee votes. President Clinton signed the bill into Public Law on December 21, 2000.

The visuals are great!

However, there’s many doors he opens leaves them unexplained, and didn’t quite touch fractional reserves and inflation. But it’s still very good at explaining the moral hazard side of this crisis.

Imagine a video of this quality explaining the ABCT!

Eric,

I somewhat agree with putting blame in the video and the video does present credit derivative mechanics well.

However, the video “infers” blame on Banks and other Financial Institutes. It could be somewhat misleading because CDOs, CMOs CDSs, etc. have been blamed for the our global economic failure. So it does air a pointed-evil-finger at Wall Street alone.

“He who points a finger has three pointing back….”

The animation is well done and this is the standard you need to deliver… for the good cause and to the glory of Mises. I like the strictly mechanical feeling that suggests economy is a logical process. Also: leverage is first mentioned and it might therefore come out as the first culprit… a small step towards FRB critic perhaps.

The 1% rate blame is put on Greenspan and the Fed… but here, the mechanism doesn’t show.

Like everyone here I agree though, the message as it is, is over-simplified at some crucial nodes.

What I disliked the most: the authors link the initial increase of default from homeowners to their “less responsible” behaviour somehow (around Min 8).

In order not to go too much into details, the depiction should mention rather that the real estate market had been saturated. No matter the tricks to “include everyone” and expand forever, it’s the increase in houseprices itself that caused its own collapse. Soon, all even reasonable lenders were involved in an “irrational market”. What caused it to contract in 2006 first though, was its disproportional grow in relation to the rest of the lagging economy… that’s what caused the Fed (and european CBs) to raise rates, etc. That injustice of inflation can easily be linked to FRB and leverage too, and to the deadly game with interest rates.

In fact, prices started to even stall in Europe though mortgage practices stayed VERY conservative over there.

Second critic:

I agree with the other commentators about the videos lack of explanation of the culpability of the Fed and the Congress. Unless those two are shown their part in this mess, then the message is only “Those Greedy Free-Market Capitalists” all over again!

The investment banks didn’t get “The Idea” on their own. Congress told them to get “The Idea”. The White House told them that that was the goal, and the Fed made it a nessesary part of staving off an earlier collapse of the bubble the Fed started blowing in the first place with the low interest! The Video did touch on this last point for a moment, but never returned to it. Instead, the Fed’s changes are treated like the hand of god, and the rest is the folly of men.

The effect on the public will be to leave the public wanting a “Solution” which the culpable Fed and Congress will be all to happy to deliver!!

To all of those that argue the points of the problems with the federal reserve bank (notice I use lower case), the CRA, et al: I fully agree with your points. But, how long do you want the video to be? Take it for what it is, a great animation and a pretty good explanation of CDO’s, CDS’s, etc, for the lamen. If, other issues would have been addressed, it would take an entire series of hours long videos to cover all of this, as has been mentioned. You are all very smart, you can make videos also.