The 2008 Financial Crisis Explained!

If you like your explanations to be illustrated, here's just the one for you. It explains the 2008 real estate bubble...



I love the way the ending is presented as a "perils of Pauline". It leaves you hanging... wondering... how will this new debt be paid off?

It implies that we are all in deep trouble and that a new crisis is surely at hand. Well... it is good to learn fear. That helps prevent the next bubble. But the future isn't a continuous repetition of the past. There isn't another debt bubble about to explode. That's too simplistic.

Here's my simplistic solution: life is like a Monopoly game. One guy gets all the properties and has built hotels on them, so now every other player is simply losing money every time they take a turn and bankruptcy faces all the other players (the little people). What to do? If you play by the rules, sure enough the monopolist owns everything and the game comes to an end as you proverbially put the gun to your head and pull the trigger and depart this world. But most people aren't willing to "go easy into the great beyond". Instead, at some point as the ultra-rich own more and more and squeeze and squeeze everybody else, riots break out, the rich are seized and defenestrated as a popular move to "free up" assets (a "progressive era" breaks out and laws are passed to control monopolies, taxes raised on the rich, etc.). Money starts to flow back into the economy and the game of Monopoly starts all over again.

OK... seriously, things don't always get that dramatic. This crisis may end with a whimper. Here's a picture to show that people have decided to stop riding on the money merry-go-round:

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This shows that revolving credit is shrinking as people pay down (or walk away) from their debts. At the same time they have stopped adding to their non-revolving credit. The great debt-fueled bubble is at an end. The economy goes into a prolonged slump because of missing demand. The "fix" is for governments to provide a stimulus to inject the missing demand.

But that requires governments to behave more intelligently that the wild-eyed "little people" who built up mountains of debt. There is ample evidence that governments are no better at handling debt than individuals.

So you have two choices:

1. Let governments substitute for consumers and then use intelligent policies to control the debt and pay it back over a generation, but run the risk of a government-fueled debt bubble.


2. Let the consumers work their way out of the debt which means a prolonged depression and lots and lots of innocent victims (the unemployed) who lost jobs through no fault of their own.

It is a cruel dilemma. The sensitive souls opt for the second choice. Those who see themselves as rational being unencumbered by emotion or obligation, go for the first choice.