Background Notes- of the French Revolution “It was the Best of Times it was the Worst of Times”
It Was the Best of Times and the Worst of Times:
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Transcript of It Was the Best of Times and the Worst of Times:
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It Was the Best of Times and the Worst of Times:
Laura EwingTexas Council on Economic Education
[email protected] smartertexas.org
P: 713.655.1650 F: 713.655.1655
STAAR Lessons for HS US History and Economics
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Teaching Financial Crises
PowerPoint Adapted From A Presentation By Jean Walker
West Texas Center for Economic EducationCollege of Business
West Texas A&M UniversityCanyon, Texas
Lessons for HS US Economics
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Personal Financial Literacy How To Really Be A Millionaire
The Economic Way of Thinking
What do $1 trillion, 94% and $25,000 have in common?
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Is College A Lousy Investment? And the statistics say? Page 1
Why don’t people enroll in college? What are the issues? Pages 2 to 4
What are the solutions? Pages 5 to 7
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The Cost of College
Review pages 1 to 5: what is interesting?
Review one segment of pages 6 to 15. Have a one sentence summary/explanation as to the importance of the section.
Please visit the appendix for additional information
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How Much For That Candy? What prices was paid?
What are three things you learned from the activity?
What happened to the value of the $???
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Teaching Financial Crises lessons: Common elements of financial crises worldwide throughout history
Lesson 1 – compares 1907 & 2007 crises
Lesson 2 – compares 2007 crisis with: (emphasis on reading eco. Data)▪ Recession of 2001 (Dot-Com bubble burst, Enron, Worldcom, et.)▪ Recession of 1990-1991 (oil price shock due to Gulf War)▪ Recession of 1981-82 (tight money to control inflation)▪ Recession of 1973-75 (stagflation; OPEC oil embargo spiked oil prices)▪ Great Depression 1929-38 (stock market crash; falling demand)
Lesson 3 – a historical look at five bubbles & panics:▪ Tulipmania in the Dutch Republic – 1630’s▪ The South Sea Bubble – Great Britain 1711-1721▪ The Roaring 20’s Stock Bubble – 1920’s▪ Japan’s Bubble Economy – 1985-90▪ The Dot-Com Bubble – 1990’s
Lesson 4 – comparison to Lost Decade in Japan
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Teaching Financial Crises:
. . . presents an organizing framework for putting into context the media attention that has been paid to the 2008 financial crisis . . .
This publication, in it’s entirety, is included on the Virtual Economics CD, version 4.
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Teaching Financial Crises lessons: Specific focus on the recent financial crisis
Lesson 5 – focuses on monetary policy▪ Students role play as Federal Reserve Board governors
Lesson 6 – examines the housing bubble▪ Heavy use of supply/demand graphs▪ Securitization simulation for students
Lesson 7 – helps students learn terminology about modern financial markets▪ Quiz bowl game on terminology
Lesson 8 – interaction between modern financial markets and monetary and fiscal policies▪ Students take part in mock trial
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Lesson 1, Activity 3, page 11 Introduce the 2007 Financial Crisis with
Activity 3 – Characters in the Financial Crisis Announcer Joe, who needs money for his kid’s college tuition Bruce, the mortgage banker/mortgage broker Mortimer, the old-time banker Uncle Sam Wall Street banker Investment salesman Village treasurer of Narvik, Norway Bruce’s boss The World – (all together)
(Nine characters plus “the world”)
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Lesson 1, Activity 1, page 15
Have students complete Activity 1 as you progress through the slides of visual 1. If you have not taught about the recent financial crisis, you will find information in other lessons to assist with explanations.
FYI: The slides for Activity 1 are available in powerpoint on www.councilforeconed.org/financialcrises
THE PANIC OF 1907 THE FINANCIAL CRISIS OF 2007
PANDEMONIUM IN THE MARKETS
DEVASTATION SAN FRANCISCO EARTHQUAKE
Shortly after 5 a.m. on April 18, a 7.8-magnitude quake, unleashed offshore, shook the city for just less than a minute.
EVENTS IN 1906
UNCONTROLLABLE BLAZE
80% OF THE CITY DESTROYED
Though the damage from the quake was severe, the subsequent fires from broken gas lines caused the vast majority of the destruction.
SAN FRANCISCO EARTHQUAKE 1906
3,000 PEOPLE DIED THE FIRES RAGED FOR FOUR DAYS
REMEMBERING THE SAN FRANCISCO EARTHQUAKE OF 1906
TOUGH BALANCING ACT INFLEXIBLE CURRENCY
Between 1870 and 1914, many countries adhered to a gold standard.
This strictly tied national money supplies to gold stocks.
Currency was redeemed for gold at a fixed exchange rate.
THE GOLD STANDARD
THE WORLD’S FINANCIAL SYSTEM HAD BECOME COMPLEX & INTERRELATED
At the end of 1905, nearly 50% of the fire insurance in San Francisco was underwritten by British firms.
The earthquake gave rise to a massive outflow of funds—of gold—from London.
The magnitude of the resulting capital outflows in late summer and early autumn 1906 forced the Bank of England to undertake defensive measures to maintain its desired level of reserves.
The central bank responded by raising its discount rate 2.5% in 1906.
Actions by the Bank of England attracted gold imports and sharply reduced the flow of gold to the United States.
Interest rates rose and by May 1907, the United States had fallen into one of the shortest, but most severe, recessions in American history.
GREAT ECONOMIC PROMISE At the beginning
of the century, the nation was brimming with a great amount of optimism.
Here is a list of familiar companies founded between 1900 and 1905.
Eastman Kodak Firestone Tire Ford Motors Harley-Davidson Hershey U.S. Steel J.C. Penney Pepsi-Cola Texaco Sylvania Electric
EVENTS IN 1907 In October 1907 two
brothers, Otto and F. Augustus Heinze, attempted to manipulate the stock of a copper company.
They planned to corner
the market in the copper company's shares by buying aggressively in hopes they could later force short sellers to buy them at high prices.
The plan did not have sufficient backing and failed.
PANIC IN THE STREETS News a number of
prominent New York bankers were involved in the failed scheme began a crisis of confidence among depositors.
As additional institutions were implicated, queues formed outside numerous banks as people desperately sought their savings.
FURTHER COMPLICATING MATTERS
Trust companies were a financial innovation of the 1890s. They had many functions similar to state and national banks but were much less regulated. KNICKERBOCKER TRUST
COMPANY
GREATER RISKS WERE TAKEN They were able to hold
a wide array of assets and were not required to hold reserves against deposits.
They earned a higher rate of return on investments and paid out higher rates, but, to do this, they had to be highly leveraged.
They took more risks than traditional banks. Illustration from Harper's Weekly December 20, 1913 by
Walter J. Enright
A NEW YORK CITY BANK RUN IN NOVEMBER 1907
The runs on deposits that sparked the Panic of 1907 were at two of the largest New York City trust companies: Knickerbocker Trust and Trust Company of America.
THE IMPACT The crash and panic of 1907 had a dramatic effect on the
health of the American and worldwide economies. In the United States:
Commodity prices fell 21 %. Industrial production fell more than in any other crisis in
American history to that point. The dollar volume of bankruptcies declared in November
was up 47 % from the previous year. The value of all listed stocks in the U.S. fell 37 %. In October and November 1907, 25 banks and 17 trust
companies failed. Thousands of depositors lost their life savings.
Gross earnings by railroads fell by 6 % in December and production fell 11%.
Wholesale prices fell 5 %. Imports shrank 26 %. In a few short months, unemployment rose from 2.8 % to
8%. Immigration reached a peak of 1.2 million in 1907 but fell to
around 750,000 by 1909.
J.P. MORGANNEITHER ELECTED NOR
APPOINTED, HE FELT IT WAS HIS TIME TO ACT
In the absence of a strong federal regulatory structure or any safety nets, the response to this crisis had to be delivered by a private citizen, J.P. Morgan, the world’s most powerful banker.
He used all of his influence to convince fellow titans of industry to pool their resources and salvage the nation.
The Panic subsided after six weeks.
WHAT WAS DONE?
SPECULATION IN OFF-STREET MARKETS
A BUCKET SHOP IN 1907
LESSONS FROM THE PANIC OF 1907
Bucket shops were blamed for fueling the speculation in 1907. They enabled people to speculate on the value of a stock without having to purchase the stock itself. The actual order to purchase went in the “bucket.” Beginning in 1909, New York banned bucket shops and other states followed.
THE WORLD MADE HUGE INVESTMENTS IN THE U.S. HOUSING MARKET ……….AND LOST!!
By ignoring risk, remaining irrationally optimistic, and forgoing transparency through an array of fantastically complicated investment vehicles, the world’s financial markets were extremely dependent on housing prices.
The underlying assumptions were (1) that housing prices never fall and (2) homeowners almost always pay their mortgages.
THE FINANCIAL CRISIS OF 2007
DURING AND AFTER THE MILD RECESSION OF 2001, THE FED
LOWERS INTEREST RATES
FORMER FED CHAIRMAN ALAN GREENSPAN
THE ORIGINS OF THE CRISIS
FORMER PRESIDENT GEORGE BUSH
STRONGLY PROMOTED HOMEOWNERSHIP
“We can put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home” –President Bush, October 15, 2002.
THE ORIGINS OF THE CRISIS
HIGHLY COMPLEX FORMS OF FINANCING
THIS WAS TOO TEMPTING FOR THE
FINANCIAL INSTUTIONS The momentum behind the
expansion of homeownership led the government to reduce regulations and capital requirements for making loans.
This led to a dizzying number of innovative ways to get less-qualified borrowers a mortgage and seemed to reduce risk for the lender.
Mortgages could be bundled and sold around the world as securities.
CAUSES OF THE CRISIS
TRUSTED AGENCIES FAILED TO WARN INVESTORS
RISK-RATING AGENCIES
Mortgage-backed securities were constructed of mortgages of differing quality levels.
The obligations of solid
and sub-prime borrowers were mixed in a manner that made it very difficult for experts to calculate risk.
The assumption that U.S. housing prices would continue to rise and incentives to provide good ratings led agencies to rate these securities as AAA, lowering investors’ concerns.
CAUSES OF THE CRISIS
WHAT WERE WE THINKING? THE PERFECT STORM
Homeownership peaks in early 2005 at 70% of households.
The Fed raises interest rates. Home prices fall. Higher adjustable interest
rates increase payments for borrowers.
Borrowers default in waves. Dozens of subprime lenders
file for bankruptcy. Mortgage-backed securities
lose value as investors question their contents.
Financial institutions struggle to find buyers for the MBSs.
EFFECTS OF THE CRISIS
“FINANCIAL WEAPONS OF
MASS DESTRUCTION”
Financial institutions could purchase credit default swaps.
A CDS is a private insurance contract that paid off if the investment failed.
One did not actually have to own the investment to collect on the insurance.
These promises were unregulated, and the sellers did not have to set aside money to pay for losses.
THE FINANCIAL CRISIS OF 2007-2009
Bank failures: 183 (2%) 12/07-2/10 (No deposits lost)
Unemployment rate: 10.1% (10/09)
Economic decline: -4.1% (4Q 2007-2Q 2009)
Biggest drop in DJIA: -53.8% (12/07-3/09)
Emergency spending and tax reduction programs: 2.5% of GDP in 2008 and in 2009
Aggressive increase in monetary stimulus by the Fed
THE FINANCIAL CRISIS OF 2007-2009
6.7 million jobs lost in 2008 and 2009
Capital investment levels lowest in 50 years
Domestic demand declines 11 consecutive quarters
Industrial production down worldwide: Japan 31%, South Korea 26% , Russia 16% , Brazil 15% , Italy 14%, Germany 12%
The federal government unleashed a series of remedies in an attempt to limit the contagion.
Massive sums of bank reserves were created to ease fears.
In the process, the taxpayers took over or funded several familiar financial and nonfinancial companies.
This time the government bails out the economy and business leaders and bankers are criticized.
1907 2007 Highly complex and linked
financial system Strong growth in the
economy starting in 1900 Many people and institutions
highly leveraged Innovative form of finance:
trust companies Stock market setting all-time
highs A limited role for government Markets swing from great
optimism to great pessimism
Global interdependent financial system
Vibrant economic recovery after recession in 2001
Lenders willing to take more risk in making loans
Unregulated financial institutions: hedge funds
Companies reporting record earnings
Absence of many safety buffers
Dow 14,164 to 6,500 in 16 months
SIMILARITIES
1907 2007 J.P. Morgan, a private citizen,
orchestrated the bailout The Panic lasted for six weeks,
though the economy didn’t return to pre-Panic levels until 1909
Many banks were closed and many depositors lost their savings
The nation was on the gold standard and the supply of money was fixed
The San Francisco earthquake was a catalyst for the Panic
The climate toward business was hostile prior to crisis
The Federal Reserve and Treasury Department organize the reaction
The event has been unfurling for more than five years
Many banks closed and folded into healthier banks, but depositors did not lose any of their savings
The nation uses Federal Reserve notes, creating a flexible money supply
Hurricane Katrina was generally benign as a catalyst
The climate toward business was friendly prior to crisis
DIFFERENCES
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FYI: Community Reinvestment Act – signed in 1977 by
Jimmy Carter Induced lenders to enter underserved or “red-lined”
areas. 1993 -1995, President Clinton asked regulators to
reform the CRA to "deal with the problems of the inner city and distressed rural communities”--availability of credit should not depend on where a person lives.
The Interstate Banking and Branching Efficiency Act of 1994, which repealed restrictions on interstate banking, used CRA ratings as a consideration when determining whether to allow interstate branches
George Bush, as early as 2002, pushed home ownership—”an ownership nation.”
In 2007 Ben Bernanke suggested further increasing the presence of Fannie Mae and Freddie Mac in the affordable housing market to help banks fulfill their CRA obligations by providing them with more opportunities to securitize CRA-related loans.
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What do all of the explanations show? The rise in housing prices represented a bubble.
A price bubble is a situation where increases in price are not justified by fundamental factors affecting supply or demand, and therefore not sustainable.
A price bubble is often caused by contagion, which is prices increasing because people observe them going up and think they will continue to go up. At one point, people who couldn’t pay their mortgages were taking out home
equity lines of credit and using the cash to pay the mortgages! They could do this because equity in homes rose as home prices rose, and “personal bankers” were pushing home equity lines of credit.
This causes people to purchase houses with the expectation that they will be able to sell them for a higher price in a relatively short time.
It was a speculative bubble.
When the bubble burst in 2006, house prices tumbled.
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A Look at Historical Homeownership - USA
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How does home ownership in the US compare to the world?
U.S. Homeownership rate:
2000 67.4%2004 69.0%2010 66.9%
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Mortgage-backed securities: Positives:
Spreads risk. Not all eggs in one basket. Diversified. Made a liquid investment from an illiquid investment. Allowed smaller investors to invest in housing. Meant more money flowed into mortgage markets.
Negatives: Reduced the incentive for investors to be concerned about
the creditworthiness of borrowers. Reduced the incentive for banks and mortgage brokers to be
concerned with creditworthiness. Exported the risk around the world because the MBS
securities were stamped AAA by the ratings agencies and sold worldwide.
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Lesson 2 – Comparative Economic Performance
Before teaching this lesson, make sure students understand the concept of business cycles: Expansion Recession Peaks Troughs
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Lesson 2 – Comparative Economic Performance Growth of real GDP measures health of economy
Generally, we say two quarters of declining GDP is a recession, but economists at the National Bureau of Economic Research actually make the determination
GDP = C + I + G + Net Exports▪ Consumer spending is 60-70% of U.S. GDP▪ Investment spending, government spending, and net exports make up the rest
Contributing factors to growth: Level and rate of change of technology Investment in tools, machines, computers, infrastructure, and building Skill and experience levels of the economy’s labor
The main activity in this lesson asks students to work in groups to analyze 6 of the 14 recessions between 1929 and 2007. Before working, they should understand business cycles and how GDP and Unemployment affect or are affected by recessions.
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Lesson 2: How Economic Performance from 2007-09 Compares to Other Period in U.S. History
The Great Depression (1929-1938) Duration: 1929-1933 (43 months)
& 1937-1938 (13 months) Began with falling demand for
durables and investment goods Stock market crashed in Oct.
1929 By March 1933, 25% of the
workforce was out of work. More than 9,000 bank failures
between 1929 and 1933 Fed did not act as the lender of
last resort, even raising interest rates in late 1931
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Lesson 2: How Economic Performance from 2007-09 Compares to Other Period in U.S. History
The Recession of 1973-1975 Duration – Nov. 1973 to
March 1975 (16 months) Peak unemployment - 9.0%
(May, 1975) Inflation rate - 11% Economic stagflation Causes
▪ 1973 Oil Crisis – OPEC’s oil embargo caused “oil price shock”, which slowed production of goods and services
▪ Vietnam War
Remember Gerald Ford and the WIN buttons – Whip Inflation Now!
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Lesson 2: How Economic Performance from 2007-09 Compares to Other Period in U.S. History
The Recession of 1981-1982 Duration – July 1981 to Nov. 1982
(16 months) Peak unemployment - 10.8%
(Nov., 1982) Inflation rate – 8.9% Business bankruptcies up 50% Farmers especially hard hit
▪ Ag exports declined▪ Crop prices fell▪ Interest rates rose
Causes▪ Iranian Revolution increased oil prices
and new Iranian regime exported oil inconsistently
▪ FED adopted tight money policy (high interest rates) to break the back of inflationPresident Reagan was in office and
is often credit with “breaking the back of inflation.”
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Lesson 2: How Economic Performance from 2007-09 Compares to Other Period in U.S. History
The Recession of 1990-1991 Duration – July 1990 to March
1991 (8 months) Peak unemployment - 7.8%
(June, 1992) Although brief, the recession
caused George H.W. Bush to be defeated by Bill Clinton
Causes▪ 1990 oil price shock because of the
Gulf War▪ Ongoing concerns of savings and
loan crisis▪ After a long expansion, inflation
began to increase so the FED increased interest rates
▪ Debt accumulated in the 1980’s was a concern
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Lesson 2: How Economic Performance from 2007-09 Compares to Other Period in U.S. History
The Recession of 2001 Duration – March 2001 to
November 2001 (8 months)
Peak unemployment - 6.3% (June, 2003)
NASDAQ returns▪ 2000 (40%)▪ 2001 (21%)
Causes▪ Collapse of speculative
dot.com bubble▪ Uncertainty after attacks of 9-
11-2001▪ Accounting scandals and
fraud at Enron, Worldcom, etc.
Since most dot.com stocks were traded on the NASDAQ, the stock graph tells the story of the bubble collapse that was a cause of the recession.
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Lesson 2: How Economic Performance from 2007-09 Compares to Other Period in U.S. History
The Financial Crisis of 2007-09 Duration – December 2007 to
June 2009 (18 months) Peak unemployment - 10.1%
(October, 2009) GDP Decline peak to trough:
(4.1%) Bank failures (2007 – 2009): 168 Causes
▪ Subprime mortgage crisis led to housing market collapse
▪ Collapse of MBS brought down Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, and AIG
▪ Investment banks used too much leverage
▪ All remaining investment banks turned into commercial banks
▪ Government bailout of financial services and auto industries
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Lesson 3 – Manias, Bubbles, and Panics in World History
▪ Tulipmania in the Dutch Republic – 1630’s▪ The South Sea Bubble – Great Britain
1711-1721▪ The Roaring 20’s Stock Bubble – 1920’s▪ Japan’s Bubble Economy – 1985-90▪ The Dot-Com Bubble – 1990’s
http://www.library.hbs.edu/hc/historicalreturns/fb/movie.html
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What is a bubble? Hyman Minsky’s phases of a bubble:
Displacement▪ Crisis begins with an outside shock to the system—war, new invention, political event, etc.
Boom▪ Rapid rise in prices of a financial or physical asset as investors and speculators earn profits
Euphoria▪ People take more risk as more credit is offered. High profits repeat the cycle, and at some point rational decision-
making succumbs to manic behavior.
Profit-taking▪ A few insiders begin to take profits and get out, and price increases begin to level out.
Panic▪ The failure of a large institution, the realization of a swindle, or an increase in the supply of the asset bring everyone
back to their senses. People scramble to sell as the price falls.
Bailout (not a part of Minsky’s description)▪ A central bank may expand the money supply to salvage essential financial institutions.▪ Rationale: don’t make the whole economy pay for the actions of a few.▪ Negative externality: the anticipation of a bailout may indirectly add to the problem because people may take
greater risks if they know there is a safety net—this is known as a moral hazard.▪ John Kenneth Galbraith suggests investors have a short financial memory and investors have a tendency to attribute
greater intelligence to individuals who have higher income or control more wealth.
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What is a bubble?
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Bubble Quotes
“The four most expensive words in the English language are, this time it’s different.”
attributed to Sir John Templeton
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Japan’s Lost Decade: 1991-2000
LESSON
4
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Japan: Late 1980’s Strong demand for Japanese exports
Large amounts of foreign currency flowed to Japan as a result Low interest rates Speculative surge in Japanese stock market Speculative surge in Japanese real estate Boom in stocks and real estate were supported by debt Japanese govt. feared an asset bubble and decided to
“pop the bubble” by increasing interest rates It had been easy for the Japanese to borrow money to invest in
stocks or real estate because rates had been low Collapse in prices led to a credit crisis—banks suffered massive
losses as defaults on loans rose
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Attempt to Recover: 1990’s Govt. injected massive amount of money
into banks—was controversial Government said banks were “too big to fail” This led to “zombie banks”
The problems in real estate and stock spilled over into the rest of the economy Housing prices peaked in 1991
The whole economy fell into recession A series of graphs in Activity 2 compares
the 2007 recession in the U.S. to Japan’s lost decade
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Japan’s recovery By 1995, the Japanese had spent nearly $2.1
trillion on public projects to stimulate the economy.
In 1994-95 the economy began to rebound, but it was a false recovery. The stimulus plans had created huge budget deficits. Some argued the govt. stopped spending too soon;
others argued reducing taxes would have been better. The govt. increased taxes to reduce the deficits, and
by 1997, growth was again at zero. Between 1994 and 2009, prices declined (deflation) in
all but one year. Growth recovered in 2003-04.
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Should we be worried? Through opinion pieces in the Financial
Times and Washington Post, Larry Summers, former economic adviser to Barack Obama and Treasury secretary under Bill Clinton’s presidency, expressed concern that the United States is heading for a “lost decade” similar to Japan’s lost decade in the 1990s.
This country has already experienced five years of economic growth under 1% annually, and that’s half way to a decade.
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The Next Bubble?????
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Financial Crisis:
What happened?
Why?
In 5 years, how far have we come?
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The Last 5 Years: GDP
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The Last 10 Years: Unemployment
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The Last 5 Years: Stock Markets
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The Last 25 Years: Housing Prices
The Case-Schiller Price Index represents the real price of housing throughout the country, so it is inflation-adjusted.
The index equals 100 for the price of housing in 1980.
Prices peaked in 2006.
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Fall, 2007 – Trouble on the Horizon In the fall of 2007, the “subprime crisis” was a
concern, and we began to realize the real estate bubble had burst. (Home prices peaked in 2006.)
However, the stock market peaked, and GDP in the 2nd & 3rd quarters of 2007 was especially strong.
Generally, people deeply involved in finance began to talk about problems in the credit markets and a lack of liquidity.
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From BusinessWeek, 9-3-07
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From BusinessWeek, 9-24-07
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2008: The Year It All Fell Apart December, 2007
Dec. 11 – Fed begins lending to banks for longer than overnight. (By October 2008, many banks are on Fed life support.)
January Jan. 12 – Bank of America agrees to buy Countrywide
Financial, the largest mortgage lender, and casualty of the mortgage-default crisis.
February Feb. 8 – Congress approves a $168 billion economic
stimulus plan. Feb. 29 – Dollar hits record low against euro.
March March 17 – Bear Stearns, which traded at a share price of
nearly $90 per share in January, sells itself to J.P. Morgan Chase for $2 per share, with the Fed providing special financing. Mortgage-backed securities took them down.
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2008, The Year It All Fell Apart April
April 18, 19 – Merrill Lynch posts a $1.96 billion loss; Citigroup posts a $5.1 billion quarterly loss.
April 30 – Countrywide Financial posts a $893 million loss. May
May 9 – AIG posts $7.8 billion quarterly loss. June
June 9 – Average price of gasoline in U.S. first hits $4 a gallon.
June 21 – Bond insurers MBIA and Ambac lose AAA ratings from Moody’s.
July July 12 – Regulators seize IndyMac bank. July 14 – Treasury and Fed place Fannie Mae and Freddie
Mac under govt. control. July 31 – Pres. Bush signs a housing-rescue bill.
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September 2008: The Month Wall Street Died August
August 7 – Freddie Mac posts an $821 million loss; AIG reports a $5.4 billion loss.
September – Wall Street Journal calls Sept. 14 – 21, “The Week That Wall Street Died” Sept. 7 – Govt. seizes Fannie and Freddie; Treasury replaces CEOs
and buys $1 billion of preferred shares in each. Sept. 14 – Merrill Lynch sells itself to Bank of America . Sept. 15 – Lehman Brothers files for bankruptcy. Fed and
Treasury choose to let Lehman fail. (In hindsight, probably a disastrous decision.)
Sept. 16 – Banks stop lending to each other. Sept. 17 - Govt. seizes control of AIG, makes $85 billion loan and
receives warrants in exchange. Sept 21 – Fed converts the last two major investment banks, Morgan
Stanley and Goldman Sachs into traditional bank-holding companies.
Sept. 24 – Goldman Sachs gets $5 billion investment from Warren Buffett.
Sept. 26 – Feds seize Washington Mutual and sell it to J.P. Morgan Chase—largest bank failure in U.S. history.
Sept. 30 – Citigroup agrees to acquire Wachovia, and Wells Fargo makes higher bid. Congress passes the bailout bill.
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2008, The Year It All Fell Apart
October Oct. 4 - President Bush signs $700 billion bailout bill. Oct. 8 – Fed says it will lend directly to U.S. corporations for the first time
since the Great Depression. Oct. 9 – World Central Banks coordinate lowering of short-term rates. Dow down 14% in October, worst month in % terms in 10 years.
November Nov. 10 – Govt. scraps $123 billion deal with AIG and replaces it with a $150
billion package on better terms. Govt. injects $20 billion into Citigroup and guarantees $300 billion of its
troubled assets.
December Dec. 9 – On this date, only McDonald’s and Walmart in the Dow have higher
stock prices that this date last year. Dec. 12 – Fund advisor Bernie Madoff is arrested by federal agents in a $50
billion Ponzi scheme. Dec. 17 – Fed funds rate cut to 0 - .25%. Dec. 17 – Goldman Sachs posts $2.12 billion loss, first since going public in
1999. Dec. 20 – White House agrees to lend GM and Chrysler $17.4 billion.
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2008 – Winners & LosersSample of Bankruptcy filings in 2008:
Sharper Image Lillian Vernon Aloha Airgroup, ATA Airlines, Skybus
Airlines, Frontier Airlines Linens ‘N Things Tropicana Entertainment (casino
operator) Circuit City Pilgrim’s Pride (chicken processor) Tribune (newspaper publisher)
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How did major players survive 2008?
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How did major players survive 2008?
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How did major players survive 2008?
One of the very few beneficiaries of the Recession
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Fed’s Effort to Stimulate the Economy
Unintended consequence of low rates since 2009: when interest rates are low, corresponding investment yields are low and investors move to riskier assets trying to find yield.
Economic Misery and Presidential Elections
Focus:If a presidential election were held tomorrow, what would be three issues of concern for you that would impact your vote?1. 2. 3.
Homework: Activity A 8. 1Ask a person who is at least 18 years of age the following question:
Please indicate the three issues that are most important to you as you decide who will get your vote in a U. S. presidential election.1. 2. 3.
Due Date; ________________________________________________
Homework Due _______1. What are the common answers?
2. What do you think about the answers?
3. How many are economic answers?
Definitions
Visual 8.1
Economic Indicators
Statistics Based on Indicators
Unemployment RateInflation rateGrowth rate in per capita GDP
Misery IndexGrowth rate in real GDP
Do you think the economy is in good shape today?
What do the indicators indicate about the economy?
Indicators1. Unemployment rate: the percentage of people in the
labor force who are unemployed.2. Inflation rate: The percentage increase in the overall
price level. 3. Real GDP: the value of all final goods and services
produced in a country in a year, expressed in terms of constant dollars.
Statistics Based on Indicators
1. Misery Index: The sum of the unemployment rate and the inflation rate.
2. Real Per Capita GDP Growth Rate: The percentage change in real GDP per person
Activity 8.2 Economic Indicators for Presidential Election
Think, Pair, Share1. 1. What do you see on the chart?2. 2. What year since 1957 has the
unemployment rate been the highest?3. 3. What year had the highest inflation rate?4. What year had the highest Misery Index?
Who Won Presidential Elections?
Did the incumbent win?Did the “in office” party win?
PredictionsPredict who you think will win based on the data onActivity 8.2.
Write two or more rules that demonstrated how to apply the data
Share your rules and evaluate them.
The Economy and The PresidentReview the “rules” on 8.2 and 8.3.
Which of these rules serve as a strong predictor?
Which ones do not?
Which election was hardest to predict and why?
Do economics play a role in presidential elections?
ClosureDo you believe the data we have studied
shows that economic conditions impact presidential elections?
Is it fair to blame or give credit to the incumbent ?
Play FullEconomics
How can you make math, CT and social
studies hands-on and relevant while
teaching critical thinking skills?
Texas Essential Knowledge and SkillsEconomics and Play Dough EconomicsDescribe how the free
enterprise system works
Lesson 12:Market Price II
Market Price: Changes in Supply and Demand
Concepts of the USFree Enterprise
Economic System•How do changes in demand affect market price?
•How does the market price guide what producers or suppliers produce?
Concepts of the Texas/USFree Enterprise
Economic System•Why must costs be subtracted from revenues to determine profits?
•How can certain events cause costs to change, which can affect profits?
Market Price Focus
1. What is meant by demand?2. What are three things you demand
economically?3. How much will you pay for them?4. What determines if you demand/buy
them?
Market Price Competition
1. We will divide into factories with 4 to 6 workers in each factory.
2. Choose a production manager.3. Choose an accountant
Production Rounds
1. There will be 3 rounds of 5 minutes each.2. You will produce any amount, but at least
one of the apple, hammer, shirt and cup/saucer in 2 inch dimensions.
3. Each product must have 2 colors.
Production Rounds
1. Each product must have 2 colors.2. You may only use your hands – no capital.3. You may specialize.4. Produce at least one of each but as many
as possible.
Get Your Play Dough
Production Rounds
1. Each product must have 2 colors.2. You may only use your hands – no capital.3. You may specialize.4. Produce at least one of each but as many
as possible.
Time IS UP!
1. Count the quantity produced of each product.2. Record the quantities on the “Revenues
Worksheet”3. We will do a class total.4. We will draw a demand card.5. We will determine prices and factory earnings.
Supply, Demand and Market Price Chart
Goods Supplied by Class
Resulting Market
Price With NO
Change in Demand
Resulting Market
Price with Decrease
in Demand
Resulting Market
Price with Increase in
Demand
0-8 $10 $8 $13
9-12 $7 $5 $10
13-16 $5 $3 $7
17-20 $3.50 $2 $4
Over 20 $2 $1 $3
Between The Rounds1. Tally your round one results2. Plan your production strategy for
round 2.3. The production manager has the final
authority on what to produce.
Get Your Play Dough
Production Rounds
1. Each product must have 2 colors.2. You may only use your hands – no capital.3. You may specialize.4. Produce at least one of each but as many
as possible.
Time IS UP!
1. Count the quantity produced of each product.2. Record the quantities on the “Revenues
Worksheet.3. We will do a class total.4. We will draw a demand card.5. We will determine prices and factory earnings.
Supply, Demand and Market Price Chart
Goods Supplied by Class
Resulting Market
Price With NO
Change in Demand
Resulting Market
Price with Decrease
in Demand
Resulting Market
Price with Increase in
Demand
0-8 $10 $8 $13
9-12 $7 $5 $10
13-16 $5 $3 $7
17-20 $3.50 $2 $4
Over 20 $2 $1 $3
Process1. What patterns do you see in the Supply,
Demand, and Market Price Chart?2. In a market, what two things are needed
for a price to be determined?3. What caused price to change?
More Process4. How did price influence
your production decisions?
5. How did other groups influence your strategy and plans?
Concepts of the Texas/USFree EnterpriseEconomic System
•How do changes in demand and supply affect •market price?
•How does market price help producers determine what to produce?
Process1. What trends do you see ?2. What are three things you have learned
about how the market or free enterprise system operates?
3. What concepts and TEKS would this activity teach?
Laura Ewing
PresidentTexas Council on Economic Educationwww.economicstexas.org [email protected]