Here we examine the U.S. economic crisis and interventions using the four step VIT approach:

1. Think Big - Visually!   Put the situation and all its pieces into visual form -- a framework -- so all the elements and their many interconnections can be seen.
2. Gain Perspective!   Use the framework to identify and seek out the data and trends needed to gain valuable perspective; begin to see outside the box.
3. See the Way Forward!   Use the perspective to envision possibilities -- including some outside the box -- for the way forward; create a roadmap.
4. Act with Many Others!   Don't be overwhelmed by factors that may be out of your control. Act locally while sharing your vision and collaborating with others.

Updated 13 Feb 2009

1. Think Big - Visually!  Put the situation and all its pieces into visual form -- a framework -- so all the elements and their many interconnections can be seen.
 
National economies are complex systems composed of circulating flows of monies paid for goods, services, labor, rents, natural resources, etc. At a broad level, the structure of an economic system includes five major interacting elements or sectors as depicted to the right. These five sectors are households, firms/suppliers, the financial sector, the government sector, and the foreign sector. Note that firms and their suppliers and the money flows between them (business-to-business purchases) are considered here as a single economic unit.

In this model, the circulation of monies (e.g., wages and spending) between the households and firms/suppliers is the "core economic engine." When households spend more, firms/suppliers hire more people and pay higher wages, creating a positive upward spiral of growth. When households spend less, firms/suppliers hire fewer people and pay lower wages, creating a downward spiral of recession. When household spending and firm/supplier production are stable and in reasonable balance, the system is in equilibrium.

As shown, the financial, government, and foreign sectors collectively take from, and add to the core economic engine via "outflows" and "inflows" (called "leakages" and "injections" in economic theory). The financial sector enables growth by investing savings into households and firms/suppliers via loans, bonds, equities, etc. The government sector enables growth by investing tax revenues in infrastructure, research, education, etc. (in addition to security and entitlement programs). The foreign sector enables growth when exports exceed imports (positive balance of trade). The foreign sector (e.g., China and oil-rich nations) also currently purchases most of the U.S. Government's debt offerings with their trade surpluses.

2. Gain Perspective!  Understand How the Economy Got Into Trouble.
 
1 & 2. Lax regulation by the government sector allowed the financial sector to increasingly slip into high risk lending practices, including sub-prime mortgages (mortgages to high-risk homebuyers) and "option ARMs" -- Adjustable Rate Mortgages ("backloaded" mortgages with unrealistically low early payments). 

3. Households were now capable of buying new homes beyond their means as well as easily extracting all the equity from their existing homes. This fueled escalating residential real estate values in the period from 1997 to 2007, creating a housing market bubble of about $12T (trillion) in fictitious value at its peak (see more at visualization of market bubbles). 

4. This bubble burst in 2007, setting off a chain reaction of financial problems as real estate values plummeted, falling below the amounts owed on mortgages. Also, ARM rates began to adjust upwards.

5. The number of foreclosures began to skyrocket along with the inventory of unsold houses. This situation was exacerbated by excess housing capacity built during the bubble and buyers holding out for prices to drop further. 

6. Either unable to sell foreclosed houses, or selling them for far less than the mortgage amount, the financial institutions holding the debt (much in mortgage-backed securities bought by Wall St.) became insolvent and/or illiquid. Private investors began to pull out their capital.

7. Being insolvent/illiquid and not gaining but losing private capital, the financial sector became unable to provide credit to businesses or households to purchase equipment, materials, homes, autos, etc.

8. This lack of credit is creating an escalating business crisis as spending falls, so firms/suppliers have begun laying off workers, which further reduces household spending, putting the economy into a steep downward spiral (i.e., the engine is losing RPMs).
 

3a. See the Way Forward!  Design Interventions to Reverse the Spiral.
 
To help prevent the U.S. economic engine from further stalling, the U.S. Government is in the process of taking a number of steps to stop the downward spiral and restore economic equilibrium:

-- Reduced the prime rate to help ease the credit crunch.

-- Passed the $700B Troubled Assets Relief Program (TARP) to buy troubled assets from banks to reduce the insolvency/illiquidity problem and thus restore the availability of credit. $17.4B of this money was also used to temporarily shore up Detroit automakers who are bleeding red ink as auto sales have fallen dramatically.

-- Is in the process of passing an $800B economic stimulus program, including mortgage relief for homeowners under threat of foreclosure, home purchase tax credits, general tax relief for the middle class to increase spending, and new government programs to increase spending and create jobs.

-- Is working on improved banking regulation and oversight to prevent the high-risk lending practices that led to this crisis.