File:Subprime diagram.png

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[edit] References

The many articles used as sources for this diagram are those used for the 2007 Subprime mortgage financial crisis. Hopefully, this helps you visualize the elements. There is no substitute for reading the article first, as this diagram is intended to illustrate the interaction of the many complex elements described fully in the article. A few key points in interpreting the diagram:

• The many elements of the diagram interact and provide feedback on each other to varying degrees. This is a very simplistic representation. It would take a rather complex computer simulation to show the interaction of the two meta markets--the housing market and the credit market.
• The circular arrows indicate a strong feedback loop or cyclical process, where the factors interact.
• The "housing wealth engine" refers to the idea that as housing prices went up, people used homes like ATM's, borrowing against equity to use for consumer spending. When housing prices stopped appreciating and liquidity dried up, this engine slowed considerably, reducing consumer spending and applying downward pressure to GDP. This is the "real" or "main street" economy.
• The "securitization engine" refers to the ability of financial institutions and mortgage providers to obtain and lend funds through mortgage backed securities, which ultimately derive their value from home prices. While home prices were going up, the engine drove funds into the housing market. Now that engine has slowed considerably, as MBS are now perceived as high risk or "toxic" investments. Alan Greenspan has said repeatedly that until home prices have hit bottom, MBS values will be volatile and the crisis will continue. This is the "Wall Street" economy. Non-financial institutions have minimal direct impact from this aspect of the crisis, except for paying higher interest rates for loans.
• The diagram does not assign relative importance. Some factors are critical to the housing market or the credit markets; some are critical to both. Experts disagree on which factors matter most.
• There are other key factors excluded from the diagram. Again, it is an overview to show various aspects.

The letters from Fed Chairman Bernanke provide a helpful explanation of the subject.^{[1] [2]}

Further, several cover stories and in-depth articles appeared in the Economist^{[3] [4] [5]} and Business Week.^[6]

Former Federal Reserve Chairman Greenspan wrote an Op Ed piece for the Wall Street Journal that summarizes the crisis from a variety of angles.^[7]

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