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Download rise Favorable interest rates Policies promoting home
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ECONOMIC CRISIS EXAMPLE A simple example of systems thinking applied to the 2008-2009 economic crisis involves the unprecedented growth of housing demand that was initially fed by favorable interest rates and policies that promoted home ownership. This example is derived from the more comprehensive discussion in Financial Whirlpools. Using causal loop diagrams, the slideshow on this page traces the progression of events and interactions that describe growth and decay in the housing and financial markets during the crisis. Slides 1 through 3 show the growth cycle. In these slides, favorable interest rates and home ownership policies stimulated housing demand. High demand drove housing prices up and fueled the expectation of a continuing rise in prices which further amplified demand. Demand for houses and favorable policies promoted high risk home loans which in turn encouraged sales of high risk securities that were built from these loans. These conditions expanded home ownership, allowed home owners to amass wealth, increased profit for investors, and created a spike in U.S. GDP. In this depiction, three reinforcing loops generated unbounded growth. However, because growth cannot continue forever, because policies changed, and because many borrowers were overextended, these same loops just as rapidly generated devastating decay. Slides 4 through 6 illustrate the decay cycle in which higher interest rates and tight lending policies eventually exacerbated defaults on high risk loans and ended with foreclosures, securities failures, corporate bankruptcies and national bailouts. • Favorable interest rates • Policies promoting home ownership s Expectation that prices will rise R Demand for houses s s Housing prices GROWTH LOOP Everything increases © 2013 Karen L. Higgins, Ph.D. 2 • Favorable interest rates • Policies promoting home ownership s Expectation that prices will rise R s s Demand for houses R High risk loans s s Housing prices GROWTH LOOPS Everything increases © 2013 Karen L. Higgins, Ph.D. 3 • Favorable interest rates • Policies promoting home ownership Deregulation s High risk securities Expectation that prices will rise R s s Demand for houses R s s High risk loans R s s Housing prices GROWTH LOOPS Everything increases © 2013 Karen L. Higgins, Ph.D. 4 • Favorable interest rates • Policies promoting home ownership s High risk securities Expectation that prices will rise R s Deregulation s Demand for houses R s s High risk loans R s s Housing prices © 2013 Karen L. Higgins, Ph.D. • Home ownership/ nest eggs • Speculator profit • Financial organization profit • GDP growth POSITIVE OUTCOMES 5 ENVIRONMENT CHANGED Deregulation • Rising interest rates [ARM reset] • Tight lending policies s High risk securities Expectation that prices will fall R s s Demand for houses R s s High risk loans R s s Housing prices DECAY LOOPS Everything decreases © 2013 Karen L. Higgins, Ph.D. 6 Deregulation • Rising interest rates [ARM reset] • Tight lending policies s High risk securities Expectation that prices will fall R s s Demand for houses R s s High risk loans R s s Housing prices • Loan defaults/ foreclosures • Securities failures • Corporate bankruptcies • National bailouts NEGATIVE OUTCOMES 7
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