Overview:
One house in foreclosure doesn’t cripple the U.S. financial system, but thousands of houses in foreclosure is one of the causes in a “chain of events” that negatively compounds throughout the economy.
A Root Cause Analysis of the 2008-2009 Financial Mess
In December 2008, the National Bureau of Economic Research announced the United States had been in a recession for twelve months. Preliminary reports indicate that in fourth quarter 2008 alone, the United States GDP declined at an annual rate of 6.3%, the worst decline since 1982.
Of course, Americans didn’t need an official announcement to be convinced they had hit tough economic times. In 2008, we saw foreclosure rates increase 81% from 2007 (225% from 2006), 25 banks fail, and the national unemployment rate reach 7.2% and continue to rise. What do these numbers imply and how are they related? If you turn on the television or pick up any newspaper, you are inundated with a variety of perspectives, each trying to explain how we got into this mess and who we should blame.
The current financial crisis is a complex systems problem. The complexity of large systemic problems makes it difficult to understand and grasp how everything works together. A Cause Map can greatly improve the clarity of any dynamic problem by visually representing the cause and effect relationships that form the chain of events.
The Cause Map below shows some of the factors contributing to the current financial predicament and focuses specifically on a few of the vicious cycles that continue to fuel the problem. Click here to learn how to read a Cause Map.
Where Does the Mortgage Crisis Fit in?
Up to this point, we have been focusing on different pieces of the cause map. Below, we begin to put it together to show how the puzzle fits together and tie it to the Mortgage Crisis. When people refer to the “Mortgage Crisis”, they are alluding to the dramatic rise in mortgage delinquencies and foreclosures in the United States that began with the burst of the Housing Bubble.
