Texas Council on Economic
Education
 Laura
Ewing/President
 1801 Allen Parkway
 Houston, TX 77019
 713.655.1650
 www.economicstexas.org
If a presidential election were held tomorrow, what
would be three issues of concern for you that would
impact your vote?
1.
2.
3.
Ask 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; ________________________________________________
1.
What are the common answers?
2. What do you think about the answers?
3. How many are economic answers?
What do the indicators indicate about the
economy?
Economic Indicators
Unemployment Rate
Inflation rate
Growth rate in per
capita GDP
Statistics Based on
Indicators
Misery Index
Visual
8.1rate in real GDP
Growth
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.
1.
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
Think, Pair, Share
1. 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?
Did the incumbent win?
Did the “in office” party win?
LESSON 8 – ECONOMIC MISERY AND PRESIDENTIAL ELECTIONS
VISUAL 8.1
SOME KEY ECONOMIC INDICATORS
• Unemployment Rate: The percentage of people in the labor force
who are unemployed
• Inflation Rate: The percentage increase in the overall price level
• Real GDP: The value of all final goods and services produced in a
country in a year, expressed in terms of constant dollars.
TWO STATISTICS BASED ON THESE INDICATORS
• Misery Index: The sum of the unemployment rate and the inflation
rate.
• Growth rate in real GDP per capita: The percentage change in the
real GDP per person.
ELECTION LESSONS © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
LESSON 8 – ECONOMIC MISERY AND PRESIDENTIAL ELECTIONS
VISUAL 8.2
AN ECONOMIC RULE THAT DOES NOT WORK WELL
A Real GDP per capita growth rule:
The incumbent party usually wins if…
The growth rate of real GDP per capita is greater than 0%
during the year of the election
ELECTION LESSONS © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
LESSON 8 – ECONOMIC MISERY AND PRESIDENTIAL ELECTIONS
VISUAL 8.3
SOME ECONOMIC RULES THAT WORK WELL
A Real GDP per capita growth rule:
The incumbent party usually wins if…
The growth rate of Real GDP per capita is greater than or equal to
2.5% during the year of the election.
A Misery Index rule:
The incumbent party usually wins if…
The Misery Index has not increased from the year prior to the
election.
ELECTION LESSONS © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
LESSON 8 – ECONOMIC MISERY AND PRESIDENTIAL ELECTIONS
VISUAL 8.3
SOME ECONOMIC RULES THAT WORK WELL
Students:
• Write winners of elections.
• Apply rules.
ELECTION LESSONS © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
LESSON 8 – ECONOMIC MISERY AND PRESIDENTIAL ELECTIONS
VISUAL 8.3
SOME ECONOMIC RULES THAT WORK WELL
ELECTION LESSONS © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
Predict who you think will win based on the data on
Activity 8.2.
Write two or more rules that demonstrated how to
apply the data
Share your rules and evaluate them.
Review the “rules” on 8.2 and 8.3.
Which of these rules serve as a strong predictor?
Which ones do not?
LESSON 8 – ECONOMIC MISERY AND PRESIDENTIAL ELECTIONS
VISUAL 8.3
SOME ECONOMIC RULES THAT WORK WELL
A Real GDP per capita growth rule:
The incumbent party usually wins if…
The growth rate of Real GDP per capita is greater than or equal to
2.5% during the year of the election.
The Real GDP per capita growth rule predicted 10 of last 13 elections…
ELECTION LESSONS © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
LESSON 8 – ECONOMIC MISERY AND PRESIDENTIAL ELECTIONS
VISUAL 8.3
SOME ECONOMIC RULES THAT WORK WELL
The Misery Index rule has predicted 11 out of the last 13 elections…
A Misery Index rule:
The incumbent party usually wins if…
The Misery Index has not increased from the year prior to the
election.
ELECTION LESSONS © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
LESSON 8 – ECONOMIC MISERY AND PRESIDENTIAL ELECTIONS
VISUAL FOR STEP 16 – Predicting the Next Election
Year
Growt
h in
Real
GDP
per
Capita
Unem
ploym
ent
Rate
Inflati
on
Rate
Misery
Index
2009
-4.3
9.3
-0.4
8.9
2010
2.2
9.6
1.6
11.2
2011
0.9
8.9
3.2
12.1
2012
???
???
???
???
Growt
h Rule
ELECTION LESSONS © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
Misery
Index
Rule
Candid Incum
ates
bent
Party
Wins
or
Loses?
Obama
vs.
Romne
y
LESSON 8 – ECONOMIC MISERY AND PRESIDENTIAL ELECTIONS
VISUAL FOR STEP 16 – Predicting the Next Election
Year
Growt
h in
Real
GDP
per
Capita
Unem
ploym
ent
Rate
Inflati
on
Rate
Misery
Index
2009
-4.3
9.3
-0.4
8.9
2010
2.2
9.6
1.6
11.2
2011
0.9
8.9
3.2
12.1
2012
???
???
???
???
Current 0.6
Data
Growt
h Rule
Romne
y
Win
ELECTION LESSONS © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
Misery
Index
Rule
Candid Incum
ates
bent
Party
Wins
or
Loses?
Obama
vs.
Romne
y
???
LESSON 8 – ECONOMIC MISERY AND PRESIDENTIAL ELECTIONS
VISUAL FOR STEP 16 – Predicting the Next Election
Year
Growt
h in
Real
GDP
per
Capita
Unem
ploym
ent
Rate
Inflati
on
Rate
Misery
Index
2009
-4.3
9.3
-0.4
8.9
2010
2.2
9.6
1.6
11.2
2011
0.9
8.9
3.2
12.1
2012
???
???
???
???
Current 0.6
Data
8.1
1.7
9.8
Growt
h Rule
Romne
y
Win
ELECTION LESSONS © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
Misery
Index
Rule
Obama
Win
Candid Incum
ates
bent
Party
Wins
or
Loses?
Obama
vs.
Romne
y
???
Spring 2008
Spring 2012
Do economics play a role in
presidential elections?
Do 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 ?
STAAR Lessons for HS US
History and Economics
Laura Ewing
Texas Council on Economic Education
28
STAAR Lessons for HS US Economics
PowerPoint Adapted From A Presentation By Jean
Walker
West Texas Center for Economic Education
29
• Teaches teachers who teach students who are the
future of Texas
• Provides interesting hands-on lessons that develop
critical thinking skills for students in Economics,
Social Studies, Math, and Career/Technical
Education classes.
This workshop and the accompanying materials are made
available to teachers through the generous support
of State Farm and the Council for Economic Education.
Workshop and Materials Funded
and/or Sponsored by:
32
Economics Challenge
 Fall and Spring Online Testing
In Micro, Macro and
International Economics
 Adam Smith Division
2nd place national champs
Bellaire HS 2010/3rd 2012
 David Ricardo Division 3rd
place national champs Plano
HS 2010/4th place 2012
 State competition in Austin
Personal Financial
Literacy Challenge
 Middle and High School
 Fall and spring online
challenges will
determine state finalist
candidates
 “State Play-Offs” in
Austin with cash awards
for two top teams
 HS national finals at Fed
in St. Louis
 Bellaire HS Houston 2nd
in nation 2012
10 week Student Session
How Do You Get These Materials?
www.economicstexas.org
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
37
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.
38
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
39
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”)
40
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/financialcris
es
41
PANDEMONIUM INTHE
THE
MARKETS
FINANCIAL
CRISIS OF
THE PANIC OF 1907
2007
EVENTS
IN
1906
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.
SAN FRANCISCO EARTHQUAKE
1906
80% OF THE CITY
UNCONTROLLABLE BLAZE
DESTROYED
 Though the damage from the
quake was severe, the
subsequent fires from broken
gas lines caused the vast
majority of the destruction.
REMEMBERING THE SAN FRANCISCO EARTHQUAKE OF 1906
3,000 PEOPLE DIED
THE FIRES RAGED FOR
FOUR DAYS
THE
GOLD
STANDARD
INFLEXIBLE CURRENCY
TOUGH BALANCING ACT
 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 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
Illustration from Harper's Weekly December 20, 1913 by Walter J.
Enright
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.
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.
WHAT
WAS
DONE?
J.P. MORGAN
NEITHER 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.
LESSONS FROM THE PANIC OF
1907
SPECULATION IN OFFSTREET MARKETS
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.
A BUCKET SHOP IN 1907
THE FINANCIAL CRISIS
OF
2007
……….AND LOST!!
THE WORLD MADE HUGE
INVESTMENTS IN THE U.S. HOUSING
MARKET
 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 ORIGINS OF THE
CRISIS
FORMER
FED CHAIRMAN
DURING AND AFTER THE MILD
RECESSION OF 2001, THE FED LOWERS
INTEREST RATES
ALAN GREENSPAN
THE
ORIGINS
CRISIS
STRONGLY
PROMOTED
FORMER
PRESIDENT OF THE
GEORGE BUSH
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.
THIS WAS TOO TEMPTING
CAUSES
OF
THE
CRISIS
HIGHLY COMPLEX FORMS
FOR THE FINANCIAL
OF FINANCING
 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.
INSTUTIONS
CAUSES OF THE CRISIS
RISK-RATING AGENCIES
TRUSTED AGENCIES FAILED TO
WARN INVESTORS
 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.
EFFECTS
OF
WHAT WERE
WE THE CRISIS
THE PERFECT STORM
THINKING?
 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.
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.
SIMILARITIES
1907
2007
 Highly complex and linked financial
system
 Global interdependent financial
system
 Strong growth in the economy
starting in 1900
 Vibrant economic recovery after
recession in 2001
 Many people and institutions highly
leveraged
 Lenders willing to take more risk in
making loans
 Innovative form of finance: trust
 Unregulated financial institutions:
companies
 Stock market setting all-time highs
 A limited role for government
 Markets swing from great optimism
to great pessimism
hedge funds
 Companies reporting record
earnings
 Absence of many safety buffers
 Dow 14,164 to 6,500 in 16 months
DIFFERENCES
2007
1907
 J.P. Morgan, a private citizen,





orchestrated the bailout
The Panic lasted for six weeks, though
the economy didn’t return to prePanic 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
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.
69
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.
70
A Look at Historical
Homeownership - USA
71
How does home ownership in the
US compare to the world?
U.S. Homeownership rate:
2000
2004
2010
67.4%
69.0%
66.9%
72
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.
73