Revisited Summary: The Crisis of Credit Visualized

The video "The Crisis of Credit Visualized" is a really helpful guide through the land of businessmen sitting on bags full of money. Unfortunately, or perhaps luckily, I know hardly anything about this world. It seems to be full of numbers and bad, bad, really bad people, so I don't want to be part of this world. But the more I learn about it in English class, the more I feel that I, or generally people not interested in this, people outside of this world, really should know more about it.

Well, but the real thing is: we had to write a summary about this video as a homework. My words above still remain true, but with almost no background information, I really had a hard time grasping the concept of this topic. However, as it turned out, that wasn't the problem when I summarized this video. The problem was that I forgot about the word count of 200, and therefore produced a summary of more than 300 words.

Version 1:

The video „The Crisis of Credit Visualized“, written and directed by Jonathan Jarvis, is designed to explain the Credit Crisis in a simple way. 

After 9/11 and the dot.com crisis, the U.S. Federal Reserve dropped interest for treasury bills to 1% to make lending money more attractive, consequently strengthening the economy. This low interest not only attracted consumers, but also bankers who could now lend money easily without losing much profit during deals. This led to a system called leverage: lending high amounts of money, make high profits and pay back loans easily.

The leverage system was also applied on the estate business. A mortgage broker would connect potential house owners to a lender who gives them a mortgage to fund the house. Because of constantly rising house prices, an investment banker sees a potential deal in this and buys numerous mortgages from the lender. This establishes a monthly flow of money, which is cut down into three parts: safe, okay and risky. This separation is called Collateralized Debt Obligation (CDO). If one homeowner defaults, the money flow gets weaker, which stops the risky part to be filled. However, as long as there are enough homeowners, the safe income will still be filled, which is why it is attractive to investors. This results in more CDOs and more investors willing to buy CDOs.

If homeowners default on their mortgage, the lender receives the house ownership. As the value is covered by the default, lenders can add risk and lend sub-prime mortgages to less responsible homeowners. However, this leads to more homeowners defaulting as they cannot afford their houses, which in the long turn makes house prices plumbing. Consequently, money stops flowing through the CDOs as there are more houses than mortgages. The system freezes, as no party invests into the other anymore and investors are not able to pay back there high amounts of loans and go bankrupt.

Version 2, the shortened one:

The video “The Crisis of Credit Visualized” by Jonathan Jarvis simply explains the Credit Crisis in 2002.

After 9/11 and the dot.com crisis, the U.S. Federal Reserve dropped interest for treasury bills to 1%, which attracted bankers who could now lend money easily without losing much profit during deals. This led to a system called leverage: lending high amounts of money, make high profits and pay back loans easily.

The leverage system was also applied to the estate business. Mortgage brokers connected potential house owners to mortgage lenders. Because of constantly rising house prices, investment bankers bought numerous mortgages from the lenders to establish a monthly flow of money. If one homeowner defaults, the money flow gets weaker. However, as long as there are enough homeowners, the safe income is still established, which is why it is attractive to investors.

As the value of a house is covered when the homeowners default, lenders can lend sub-prime mortgages to less responsible homeowners. This leads to more defaults, which in the long turn makes house prices plumbing. Consequently, investors stop receiving money as there are more houses than mortgages. The system freezes and investors go bankrupt.

To be honest, I think the shorter version is missing some details (that were mentioned in the first version) that would be essential to understand the concept with no background information. However, with background information in mind, I think it can help get the overall image of this topic.