What makes a crash? Historically, crashes often follow the burst of a market bubble. This article examines the current crash and credit crisis. It is meant to be used a guide for lessons on financial literacy and understanding the financial crisis. It is the first of a series.
For the project, the class should be divided into four groups representing the four crashes discussed: The current financial crisis, The Crash of 1929, The South Sea Bubble and The Tulip and Bulb craze. Each group will be responsible for writing and performing a skit about a person who got caught up in the frenzy and lost money.
Students should use actual prices and commodity names from their assigned era and, if possible, try to dress in a historically accurate fashion.
The lessons are meant to conclude with student presentations. In this first lesson the current economic crisis is introduced along with the student presentation assignment.
There have been many infamous bubbles and crashes which all share common features; these being, a bubble occurs when a commodity is priced way above its true value, eventually common sense rules and the bubble busts, usually followed by a crash, or steep decline in the market in which a given index drops by 20% or more. (Crash Definition) Our current financial crisis is no different. The recent market decline follows a sharp drop in the real-estate market and the mortgage crisis.
Real-estate was relatively cheap in the late 1990’s following a slump in the beginning of the decade. Add in the fact that loans were becoming easier to obtain as mortgages mutated from local bank instruments to global investment devices backed by investor monies. That is, once a potential home buyer met with a local banker, established his or her credit worthiness, made a substantial down-payment and began making monthly payments at a reasonable rate. At the close of the 1990’s, however, home buyers with questionable credit could obtain loans with little or no cash down at high-rates from large, global financial institutions. These sub-prime mortgages were often broken up and turned into investment vehicles known as collateralized debt obligations or C.D.O’s.
Home prices soared through the early part of this
century and the Federal Reserve cut interest rates causing the housing boom to expand further. However, eventually home values dropped and the negative movement in the real-estate sector exposed the risky mortgages creating repercussions in the banking and security industries.
The three historical crashes will be reviewed in the next article.