When I found Paddy Hirsch's video regarding Credit Default Swaps, I thought it was downright amazing. My colleague, Brad, had some solid feedback in his comment.
So I will attempt to tie-in Brad's comment and Paddy Hirsch's video(s)...
"CDOs (collateralized debt obligations) and repos (repurchase agreements) make up what economists call the "Shadow Banking System"...
CDO's
Repurchase Agreements
Shadow Banking
...this system allowed banks to become over-leveraged and overly-interconnected...
Leverage
Banks Interconnected
Thus, when the collateral in the CDOs -- in 2008, these were typically based in real-estate -- began to devalue, nearly every bank and financial institution imploded."
Numerous thoughts come to mind about this whole scenario. But the thought that sticks out the most is Hyman Minsky's Financial Instability Hypothesis which I have written about before (you can read it here).
I hope viewing Paddy Hirsch's videos coupled with Brad's comment (mixed with a shot of Hyman Minsky) explains this scenario well and doesn't leave you, badly, needing a drink.
;-)
Good stuff! CDO's, repos, and the Shadow Banking System are super interesting stuff! If we, as more typical Americans, don't understand this stuff at least a little bit, we can easily fall prey to wrongful and spurious political claims (such as: Wall Street controls DC -- it doesn't control it any more than a kid controls a parent: kids may force parents to do things, such as take them to a doctor when they jam a marble up their nose, but they don't control them).
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