Tsunami: the Making of the Financial Crisis
The financial crisis happened in a way that seemed rapid, abrupt, and without warning – three distinguishing characteristics of a tsunami. Digging deeper, this analogy actually sheds a lot of light on how the crisis came to hit us.
Joe-America-consumer was busy living beyond his means, going into debt, refinancing his house, and sometimes getting an interest-only ARM loan!
Joe-America-banker was busy taking advantage of all the deregulation. CitiGroup was formed from a commercial bank, CitiBank, and an investment group called Traveller’s Group. Do you remember the commercial?
We’re proud to announce that CitiBank has now become…CitiGroup, to bring you more, blah, blah, blah…
Now that the financial industry could engage in all the speculative, financial experimentation it wanted, it decided to try to rack up profits through fees it gained from mortgages, loans, CDSs, and other financial products! What happens when you give a kid a candy store and tell him to only eat 8 oz. max. per day? Well, they try to control themselves out of respect, but, oh, that candy is just so tempting, and it all belongs to them, and before long, they’ve lost their discipline, and pretty soon, they’ve lost their balance as well as the ability to control themselves, and, well, now the kid’s sick in the hospital, and is teeth are rotting out. Oh, well. So much for giving someone freedom.
With all the greed and lack of constraints, it was only a matter of time before people started engaging in activities that they couldn’t sustain, writing off loans they couldn’t afford, and engaging in risks that would kill them; they totally lost sight of anything but the candy. The candy of the lenders were the insane fees they made; the candy of the consumers were the nice houses and flat-screens they could buy on credit; the investors? Well, they have lived on candy since the dawn of time. It’s not that these people didn’t think to look ahead, it’s that they were busy eating candy, and didn’t want to accept the fact that consequences would come, let alone believe that the consequences would be dire. All that candy-eating was taking place on a mass scale. What do mass-scales do? They create tsunamis.
As we all know that what goes up must come down. The fed rates rose, and all that free pseudo-money created by the housing prices bubble suddenly dried up with the demand that created it. The financial and banking system (thanks to congress) was hanging on financial speculation, and financial speculation was hanging on house prices, which were hanging on unaffordable interest-only mortgages. How long do unaffordable things last? Not long. To top it off, it wasn’t simply a couple of people making mistakes — mistakes were happening on a mass scale…
…Enter tsunami
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