As I was working on Bailout Nation, I struggled to find a way to communicate the myriad forces that combined to cause the collapse.  The book details the many elements involved, but I wanted a visual way to depict what I took 20 chapters to explain.

I had long been a fan of Wall Stats — the great site that Jess Bachman runs. Over the course of a few days, I described the various factors and how they interact.

Jess took what I described, and turned it into a terrific graphic that goes a long way to explain what happened (credit the bomb to Mrs Big Picture).

It became the centerfold of the book, running just before Part IV (Bailout Nation).

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anatomy-of-a-crash

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I don’t think any other graphic has so cleanly depicted the factors that led to the crisis developed . . .

Category: Bailout Nation, Bailouts, Credit, Derivatives, Economy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

38 Responses to “7 Factors That Led to Crisis”

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  2. Dennis says:

    That is a lot of details in a very simple graphic.

    Can’t wait to read the book

  3. The Curmudgeon says:

    “Federal Reserve” is appropriately first, but all the others should be sub-headings for it. But for (remember first-year torts causation analysis?) the Fed, none of this would have happened.

  4. The secret was to communicate a lot of information as simply and clearly as possible.

    I did not want to overlay this with too much stuff — the subheads would have been too much information.

    Remember, this was to supplement a 344 page book.

  5. souelle6 says:

    Hi Barry,

    The one thing that I would say is missing is that if you pull the onion back on easy money it was all made possible by the Sino-American co-dependance. Obviously I don’t think I need to go into detail on this for the incumbent expert on the collapse. Anyways, I’m sure you’ll find a way to add that into your chart for the second edition of Bailout.

  6. sinomania says:

    @souelle6

    Yes. I think Trade would be an important addition to your chart.

    Back in 2001, the first year of China’s accession to WTO, US trade balance overall was -$358 billion, with China -$83 billion. In 2008 the US trade deficit was approximately -$677 bln, with China -$266 billion!

  7. CNBC Sucks says:

    This is brilliant, Barry Wuzzy. One thing that I will point out is that bomb has not actually exploded. All of those factors are still with us. The Government is trying to reflate a housing boom with as much more debt as possible, and if it can’t find borrowers, then it goes so far as to print money to buy its own bonds! The government has made an implicit guarantee to keep Wall Street establishment alive forevermore, no matter the continuation of excesses, no matter the cost. Nothing has really changed, we are just building an even bigger bomb for a few years down the road.

    Ehhh…nobody cares outside this and a few other blogs. It’s Summer 2009 and Americans are busy trying to figure out if they are emo or indie.

  8. Andy T says:

    “I don’t think any other graphic has so cleanly depicted the factors that led to the crisis developed . . ”

    I think the private/public Debt v. GDP (in %) is a pretty clean graph that depicts what led to the current implosion….

    Greed and Fear….

  9. Moss says:

    Sounds like we may need a sequel… additional Graphics emanating out of the ‘Bomb’.

  10. VA Voter says:

    Could it be that the true cause of the bubble and bust is oligarchy and mob psychology?

    What I mean is that all (that means ALL) countries are run by oligarchies. I’m defining oligarchy as made up of constituencies that are special interest groups such as voting blocs as well as industry groups.

    Congressperson A is petitioned (i.e. flooded with campaign contributions) from industry group AA (a member of the oligarchy). Other Congresspersons want in on the action and take positions that also get them petitions (contributions) from the industry group (mob psychology).

    After hearings and assurances that Nothing-Can-Go-Wrong, group AA gets favorable legislation passed by both houses of the Congress (mob psychology).

    The most aggressive companies in group AA exploit the legislation and make larger profits, stock increases and bonuses than their more financially conservative brethren. Stockholders and CEO’s in the conservative companies take note and demand they too should be more aggressive (mob psychology). Before long there are no conservative CEO’s running companies in group AA since they have all been replaced.

    Industry groups BB, CC, etc. (other members of the oligarchy) can’t help but see what’s going on and start petitioning Congresspersons and start their own cycle (mob psychology).

    N’est-ce pas?

  11. The Curmudgeon says:

    @CNBC sucks…exactly. Now I must depart to do my day job shoveling Uncle Ben’s shit–another refi, another fantasy appraisal, another underwater borrower, another hit to the government’s balance sheet…blah, blah, blah.

    I used to think facilitating these loans was bad, considering they’re all ultimately based on fraud. But now I see where their proliferation will hasten the demise of the oligarchy that’s running the country, and from where I sit right now, that won’t be a bad thing.

  12. The Curmudgeon says:

    Incidentally…just today, Gold up 1%, like a broken record; oil up 4%, notwithstanding Morgan Stanley’s tankers; Ten Year Yield up about 5 bp’s–this is all working out according to Ben’s plan to “reflate” things. Who knew he was so good.

  13. call me ahab says:

    CNBC Says-

    “The government has made an implicit guarantee to keep Wall Street establishment alive forevermore, no matter the continuation of excesses, no matter the cost. Nothing has really changed, we are just building an even bigger bomb for a few years down the road.”

    sadly- this appears to be the case- and appears to be working as far as equities and commodities are concerned-

    I am wondering what news would get the market’s attention- that all is not well

  14. Init4good says:

    In other words….

    Tribal Wisdom of the Dakota Indian.

    The tribal wisdom of the Dakota Indians, passed on from generation to generation, says that, “When you discover that you are riding a dead horse, the best strategy is to dismount.”

    However, in corporate America, and especially in government agencies, more advanced strategies are often employed, such as:

    1. Buying a stronger whip.
    2. Changing riders.
    3. Appointing a committee to study the horse.
    4. Arranging to visit other countries to see how other cultures ride horses.
    5. Lowering the standards so that dead horses can be included.
    6. Reclassifying the dead horse as living-impaired.
    7. Hiring outside contractors to ride the dead horse.
    8. Harnessing several dead horses together to increase speed.
    9. Providing additional funding and/or training to increase dead horse’s performance.
    10. Doing a productivity study to see if lighter riders would improve the dead horse’s performance.
    11. Declaring that as the dead horse does not have to be fed, it is less costly, carries lower overhead and therefore contributes substantially more to the bottom line of the economy than do some other horses.
    12. Rewriting the expected performance requirements for all horses.

  15. tryflyfishing says:

    Haven’t read the book yet.
    But a couple observations: is the vertical order indicative of which factors you deem more important? If not perhaps change the order to indicate such; also, maybe change the size of each horizontal bar to indicate how, relative to each other, important you think the various factors are to your hypothesis.

    Then laminate it, put the US Bill of Rights on the other side and give it out at parties.

    Sweet

  16. willid3 says:

    i think i would add the collapse in incomes of the lower 95%. had incomes not collapsed then at the very least the bomb would have been smaller. but that would have reduced the profits wall street was generating on loans to make up for that income shortfall

    ~~~

    BR: These are causes; that is an effect . . .

  17. JohnnyVee says:

    Can someone please describe what the Federal Reserve is? Who owns and/or runs it and to who’s benefit? Its my understanding that the Federal Reserve and the 12 banks that make up the Fed are owned by banks. I am confused because the Fed seems to be acting indepent of the gov’t and buying things like AIG.

  18. jr says:

    Hi willid3 Says:,

    “i think i would add the collapse in incomes of the lower 95%. ”

    Perhaps the Federal Reserve pumping money into banks has something to do with this. The new money benefits those who receive it first, ala the banks. Inflation hits the poor and those fixed incomes the hardest, as the new money filters down to them last.

    We know household income inequality between the affluent and poorer quintiles in the USA has exploded since 1970s (with the lower quintiles “flatish” and the upper quintiles showing heady growth), which is also when Nixon removed the US from its last connections to the gold standard, thus allowing the FED the ability to pump new money at its discretion.

    I wonder if the

  19. The Curmudgeon says:

    @JohnnyVee:

    This would take a book, but let me try to succinctly describe the Federal Reserve. It is comprised of several regional banks and the Federal Reserve Board of Governors. The regional banks are quasi-public/quasi-private institutions that facilitate commercial banking (e.g., check processing, etc) in their regions. Their boards are not subject to the “advice and consent” of the Congress. Far and away the most powerful of the regional banks is the New York Federal Reserve Bank (because of New York’s rapidly fading importance as a money-center), whose head was Timothy Geithner before he became the Treasury Secretary.

    The Federal Reserve Board of Governors is the real elephant in the economy right now. It’s members comprise the heads of the regional banks (that vote on a rotating basis) and other Governors that are appointed by the President and confirmed by the Senate, including its Chairman, Mr. Bernanke.

    The Federal Reserve is extra-constitutional, a statutory creation that is allowed because it is not expressly prohibited or reserved to the states (although you could get a lot of argument on the constitutional validity of its existence).

    All of it is a part of the Treasury Department. The Federal Reserve Board, and to a lesser extent, the regional banks, are tasked mainly with managing the money supply, but also with doing so as to maximize economic performance (read “minimize unemployment”).

    There’s lots more. Their web-site is a good place to start in understanding their functions. Just don’t look at their balance sheet while you’re there, unless you want to be shocked into believing Armagedon is nigh, and rushing out to stock up on canned goods and dried rice.

    If the board notices any glaring errors, please don’t hesitate to correct. I did all this from memory whilst out of the corner of my eye I watched T-bonds decline and gold and oil reach escape velocity.

  20. Stuart says:

    And where to insert the rampant fraud and corruption by participants at all levels as well as regulators and elected officials all sucking off the greed teet. Too big to jail.

  21. All of it is a part of the Treasury Department. The Federal Reserve Board, and to a lesser extent, the regional banks, are tasked mainly with managing the money supply, but also with doing so as to maximize economic performance (read “minimize unemployment”).

    Surely, you jest!! Minimize unemployment? Hahahahahahaha!!! Nothing “B-52″ Ben is doing now is minmizing that. I’d love to hear Ben talk about that before Congress though.

  22. JohnnyVee says:

    The Curmudgeon Says

    Thanks for the explanation. So when the Fed buys or lends money it does so on its own balance sheet and not the treasury’s balance sheet. What I am saying is that if the fed wants to help AIG or lend money to any entity, it simply prints the money from thin air and then collects interest on the money it created from nothing. It also doesn’t need permission from anyone except itself. What am I missing?

  23. dels says:

    Interesting graphic. Thanks.
    Month ago I started an other form of getting the crisis in a graphic. I create a central mindmap (german language) with a drill down to more maps and readings about the crisis.
    http://tinyurl.com/bqzser

  24. clawback says:

    BR,

    Here’s a nice piece on “Bailout Nation” today from The Daily Bail. Includes the Wiley promotional video AND the Amazon link for the book ;-). Looks like you’re pretty popular with the anti-bailout set.

    http://dailybail.com/home/bailout-nation.html

  25. [...] leave a comment » Great image of the financial crisis via The Big Picture [...]

  26. rep says:

    Is the crying, screaming, eventually hysterical global clamor for ever-higher-yielding MBS, coupled with the In Vogue polemics that assured that risk can be decoupled from return, a first order cause that links Financial Leverage, Mortgages & Securitization, and the holiest-of holies, Derivatives?

    And of course, Goldman Sachs drives all omnibuses, so don’t forget Professor Minsky.

    Those jolly GS fellas are today constructing the burners that will heat up the air in the next balloon in which everyone else will pay to take a ride.

  27. Graphite says:

    Wow, pretty impressive that they managed to pass Sarbanes-Oxley in this period when “any regulation was blasphemy.”

  28. After a massive accounting scandal and an 78% collapse in the Nasdaq, yes, Sarbox was passed.

    For those of you unfamiliar with the regulation, it forced CEOs and CFOs to attest their earnings statements were not fraudulent. It required that Quarterly earnings statements had to be accurate. Accounting fraud has since plummeted.

    Of course, Graphite missed the point.

    The overall trend in regulation was for the prior 2 decades were towards less, not more government supervision.

    And as I detail in the book, it was an unprecedented period of freedom from many regulations. The government, at the request of big banks, granted these firms the authority to self-police, to determine their own leverage levels, to avoid legal supervision, and other forms of what are thought of as normal regulatory environment.

    But you knew that . . .

  29. S Hegde says:

    I have been reading TBP for over a year, but after seeing this picture I had to create my id and compliment for the great but simple graphic. Also, loved one of the comments by Init4good on riding the dead horse.

  30. dscough says:

    I think your analysis was too short sighted.

    Your chart condenses a lot of information into a very readable format. I particularly like the selection of the seven threads to communicate their interrelationships.

    My problem is that your root cause analysis begins in 2000. The root causes began much earlier. They date back to Fannie Mae and Freddie Mac becoming ‘government sponsored enterprises” and Carter’s Community Reinvestment Act. The risk of elongating the chart is data overload, but shortening the timeline gives the impression that this is just more “Bush Derangement Syndrome” rewriting a history that begins when President Bush takes office, ignoring everything that happened prior.

  31. In The Newz says:

    [...] 7 factors that led to crisis (Big Picture) [...]

  32. Moss says:

    @johnny Vee

    Read the Book ‘The Creature from Jekyll Island” by G Edward Griffin.

  33. OSR says:

    That is an excellent summary of the immediate factors that lead to the crisis. Unfortunately, they are merely symptoms, I don’t see the disease addressed anywhere on the chart. For that, you’d have to go back well past 2000 and look outside of Wall Street.

  34. [...] comes from Barry Ritholtz at The Big Picture.   For now, I’m going to just post the chart.   Maybe some time [...]

  35. sagenot says:

    How did I miss this “take down?”

    WallStats.com is also new to me, thanks a bunch Barry, go get ‘em!

  36. alexk says:

    Why do smart people consider regulation to be a solution when it’s it is mostly a problem?

    Ramp up in regulation will never solve anything because (a) regulators are always fighting the last war (SOX anyone?) (b) it creates an impression that something is safe just because it is being regulated (how about Fannie/Freddie, the most regulated entities around) (c) regulation gives advantage to entrenched organizations at the expense of more competition (stop giving preference to Moody and S&P, and the paid-by-those-being-rated model will die as new entrants will enter the market).

    There is very little help we need from our government (a) establish comprehensive disclosure for complex and/or consequential transactions so that a prudent lay person can make a reasonable decision (b) put insiders who lie in jail (don’t bother with fines). That’s all (OK, you can put CDS and swaps on the exchange).

    Let’s get rid of geniuses at the Fed and stop printing money. Then we will have no pervasive inflation (just like in the first couple hundreds years of US history), 90% of the population will have no business being in the market, the mutual fund charade will go away, we won’t have to wonder whether or not we have enough money for the retirement, and our life in general will be simpler and more enjoyable.

    More choices and clear consequences, not more obscure regulation. Humans are pretty good at following incentives. They will figure out the rest.

  37. rcw8888 says:

    “The Creature From Jekyll Island” by G. Edward Griffin is a very well organized and written book which explains the role of central banks in creating boom/bust economies. In the US there have been 4 central banks. The Fed is not a bank, has no reserves and is not federal (not part of the government). Via the 1913 creation, the US gov delegated the power to create money and set interest rates to this private banking cartel in a classic head-fake.

    Most contrarian financial experts credit the Fed, especially the period of Greenspan and Bernanke, with causing the bomb via imprudent lowering of interest rates and over-creation of money, way beyond the needs of the economy. A central bank run directly by the US Treasury, some argue, would eliminate the need to simultaneously create debt when it created money (assuming it would do so commensurately with the needs of the economy).

    The Fed and their banks, using fractional reserve banking (keeping only a fraction of their assets in reserved and compounding their assets with each loan (to anyone)), make monstrous income (why do you think they all work in such huge and expensive buildings). Moreover, they make a lot more trading currencies (which you can do if you choose and if you learn how).