Dr. Bernanke, vascular surgeon of last resort

This helpful narrative from the Federal Reserve Bank of Dallas presents the financial crisis of the last two years as a series of emergency vascular surgeries to unblock or bypass arteries normally carrying the flow of money from savers/investors to borrowers.

The first key event discussed is the halting of redemptions by several European investment banks 14 August 2007 because they could not price parts of their portfolios invested in securities backed by subprime mortgages and other risky assets. This led to a slow-down in interbank lending and a general increase in preferences for cash. A tightening of credit standards and reduced lending ensued. The collapse of Lehman Bros. in September 2008 is credited with triggering a run on money market funds and the drying up of markets for commercial paper. The problems at Freddie and Fannie are discussed in detail. In each case, graphics show the blockages and the bypasses placed by Dr. Bernanke in the ER.

Incidentally, the story shows the normal flows of funds and the growing displacement of banks by largely-unregulated securities-market funding mechanisms. This shadow banking system had grown from supplying less than one-third of total debt funding in 1979 to supplying almost two-thirds in 2008. AIG is not mentioned, and other events and circumstances important to the crisis are omitted, but the article is worth reading for what it does explain.