Summary: The Crisis of Credit

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The video „Crisis of Credit Visualized“by Jonathan Jarvis explains the 2008 Financial Crisis.

Credit Crisis is defined as a lack of availability of credit to consumers and businesses from financial institutions, such as banks. Previously Investors bought treasury bills from the US Federal Reserve. However, on 9/11, the interest rates were reduced to only 1%. The leverage of banks, or borrowing money to amplify the outcome of a deal, escalated. Wall Street connected investors with homeowners through mortgages. The starting point is when homeowners purchase a house. Subsequently, investment banker buys the mortgages. A CDO, or collateralized debt obligation is created. Divided in three parts: safe, okay and risky. The safe part is additionally insured with CDS, or credit default swap. When a homeowners default on their mortgage, the lender gets the house. Now the houses are offered to sub-prime mortgages, individuals with poor credit histories. These mortgages cannot be repaid so they turn into houses. The homeowners start selling their houses, as their mortgage has not changed in spite of the rapid decrease of other houses prices. This leads to System Freezing, which leads to bankrupt, and millions of worthless investments.

That is how the Crisis of Credit happens.