> > U.S. Financial Crises: What was the same? What was different?

U.S. Financial Crises: What was the same? What was different?

Rose-Marie Payan
Glendale Community College
This material is replicated on a number of sites as part of the SERC Pedagogic Service Project

Summary

This activity is intended to present a summary of financial crises in U.S. history. It is designated as an open architecture type framework in that the instructor can select as much or as little as he or she deems appropriate given classroom time constraints. Part I contains a brief PowerPoint formatted summary. The presentation provides a snapshot of key events that contributed to each of the crises and the events following the crisis. Part II is meant to be presented post lecture. In this part, the instructor has the option of presenting a short Jeopardy-style game to quiz and excite students on covered material. The activity is intended to make learning more fun and competitive. Finally, Part III contains a set of questions for homework. In the homework, students will be asked to research two specific U.S. banking crises on their own and consider the common thread linking each of the events. Students will also be asked to make comparisons.

Learning Goals

After the lecture, students should be able to
(1) appreciate the fact that neither bank examination nor deposit insurance is a sufficient safeguard against excessive risk taking.
(2) identify patterns leading to a financial crisis
(3) identify differences in among key crises

The overall goal is to make sense of the past–being able to explain what it has meant so that there is a basis for conceiving where we ought to go from here.

Other ancillary learning topics that may be emphasized by the instructor, time permitting::
* The economic history of the evolution of banking in the U.S.
* The role of moral hazard in financial markets.

Context for Use

This activity (lecture) is best suited for introduction in the last half of a typical macroeconomics course, preferably after the instructor has introduced money and the creation of the Federal Reserve. The ideal class size should be small, so as to incite comfortable class discussion. Necessary equipment entails a computer and an overhead projector.
This activity could be a good segue into the role of government in potentially regulating financial externailities relating to bubble markets. The activity can be used in an upper division money and banking class, as well.

The first step is to present the lecture (approximately 1 hour). The instructor can spend more time on those key points he/she would like to emphasize (ie, history, role of regulations, risk, etc).

Because today's students enjoy a diversity of experiences in the classroom, a useable and user-friendly version of Jeopardy is included as an activity. Following the presentation, the instructor can perk up the class by invoking the game (duration approximately 30 minutes). The general rules are as follows:

1 Divide the class into a maximum of 4 or 5 groups. Give the groups an assigned number and ask each group to nominate a group spokesperson to volunteer the group's designated responses.
2 Hand out a copy of the "Timeline Handout for Game" and "Hint List for Game." Each is only a single sheet and will serve as a general reference for students.
3 Initiate a random draw. The winner of the random draw will be allowed to go first in selecting questions from the Jeopardy Matrix.
4 When launching the Jeopardy game, the instructor should present it as a "slide show." (This is a must, otherwise the hyperlinks will not work properly.) Once the slide show is open, the 2nd mouse click will launch the Jeopardy music(20 seconds) but this can be shortened by clicking the mouse again (music will stop.) The 3rd through 7th clicks of the mouse will bring up all the categories.
5 When a student selects a category and amount, click on the cell in the matrix to bring up the challenge. Read the answer to the corresponding question. Remember, the answers come first. Students need to respond in the form of a question.
6 Be very vigilant in determining which group was first in raising a hand. Allow that group to answer.
7 Click on the question text to bring up the designated correct answer. (There is a hyperlink that will take you to the correct response.)
8 If the group has provided the correct answer, allocate points to the group on a tally sheet and be sure to maintain this record as you repeat steps 5-8 above.
9 Ask students to wager all or part of their current score on a question when they select either of the two questions marked "daily double." Once they indicate the wager amount, read the question. Add or deduct the number of wagered points from the team's score, depending on whether the answer is correct or not.
10 Continue along until all of the cells in the matrix have been eliminated from the grid. The text in the cells of the matrix turn yellow when the question has already been selected, so you will know to avoid them.
11 Designate a winner and allocate prizes as deemed appropriate. Prizes can be, for example, 10 points for the top team, 7 points for the next best team and so on.

After the game, the instructor can provide the homework sheet for students to take home and prepare before the next meeting.

Description and Teaching Materials

This section contains several items:

(1) a PowerPoint presentation that includes the economic history of early banking to the present and it identifies the key financial crises in the U.S. with a short description of the circumstances leading to each crisis. This is designated for use by the instructor in a lecture.
(2) A PowerPoint version of Jeopardy for the classroom. It is user-friendly and it can be modified to suit the instructor. (The instructor can use the questions I've created or he/she can modify any of the questions as deemed suitable.)
(3) A timeline handout for game and a hint list for game.

(4) A homework for students to do on their own, following the game.

Draft Project (PowerPoint 1.1MB Sep22 13)
Jeopardy Game (PowerPoint 1.6MB Sep22 13)
Time Line (Excel 63kB Sep22 13)
Hint Sheet (Microsoft Word 24kB Sep22 13)
Take home (Microsoft Word 38kB Sep22 13)

Teaching Notes and Tips

The instructor should make sure that students have a general understanding of a commercial bank's balance sheet and that students are familiar with the notion of fractional reserve banking. The instructor may want to spend some time during the lecture section to explain what key words mean, such as bank notes and moral hazard.

This activity was developed to frame students' thoughts about why financial crises happen. The activity is a success if students can identify the limitations behind banking regulations. Also, it would be wonderful if students can come out of this being more cautious during the exuberant" times.

Assessment

The instructor will be able to readily tell if students were able to process material from the lecture based on the enthusiasm the class displays for the question and answer section from the Jeopardy game.

References and Resources

http://en.wikipedia.org/wiki/Panic_of_1819
http://www.publicbookshelf.com/public_html/The_Great_Republic_By_the_Master_Historians_Vol_III/thepanic_ce.html
http://en.wikipedia.org/wiki/Panic_of_1837
http://en.wikipedia.org/wiki/Panic_of_1857
http://en.wikipedia.org/wiki/Long_Depression
http://en.wikipedia.org/wiki/Panic_of_1873
http://en.wikipedia.org/wiki/Panic_of_1884

http://en.wikipedia.org/wiki/Panic_of_1893
http://en.wikipedia.org/wiki/Panic_of_1907
http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
http://en.wikipedia.org/wiki/Savings_and_loan_crisis
http://www.clevelandfed.org/research/commentary/1990/0901.pdf
http://www.investopedia.com/articles/financial-theory/banking-crisis-1980s.asp
http://web.lemoyne.edu/~grovewa/whydobanksfailevidencefrom1920s.pdf
http://www.davemanuel.com/history-of-bank-failures-in-the-united-states.php
http://www.fdic.gov/bank/historical/history/3_85.pdf
http://en.wikipedia.org/wiki/List_of_bank_failures_in_the_United_States_(2008%E2%80%93present)
http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008
http://www.guardian.co.uk/business/2011/aug/07/global-financial-crisis-key-stages

http://en.wikipedia.org/wiki/Tulip_mania


Financial Markets and Institutions by Frederic S. Mishkin and Stanley G. Eakins, Pearson, 6th edition.

Money, Banking and the Economy, by Thomas Mayer, James S. Duesenberry and Robert Z. Aliber, W.W. Norton and Company, 6th edition.