Crashes and Crises: Lessons from a History of Financial Disasters

Course No. 5012
Professor Connel Fullenkamp, Ph.D.
Duke University
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Course No. 5012
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What Will You Learn?

  • numbers The history of bank panics and how they were (mostly) cured.
  • numbers How subprime mortgages sparked the Great Recession.
  • numbers Why the 1950s and early '60s were an era of unusual economic stability that could not last.

Course Overview

Banks fail. Stocks plummet. Nations default. According to World Bank economist Gerard Caprio, we are now living in a “boom in busts.” From cryptocurrency to China’s shadow banks, we must ask: What will bring the next disaster?

As you look towards the future, consider these cautionary tales from the past:

Tulip Bubble: Tulip bulbs were prized assets in 17th-century Holland. But pricing lost all touch with reality when speculation in bulb futures became a substitute for the outlawed vice of gambling, driving up prices by thirty-fold in a matter of weeks, before the inevitable crash. The bubble was fueled by easy credit and lax regulation.

1929 Stock Market Crash: Considered a bolt out of the blue by many, the plunge in stock prices in the fall of 1929 was foreshadowed by worrisome trends in the months leading up to the collapse. For example, at the height of the bull market, only about one-third of all New York Stock Exchange listings were rising. Half were already falling!

Derivative Debacle: Called “financial weapons of mass destruction” by billionaire Warren Buffet, derivatives can be safe and useful in the right hands. Unfortunately, that was not the case when Bankers Trust wrote derivative contracts for some of its major clients in the mid-1990s, putting one firm $200 million in the hole.

Exploring these and other intriguing cases in detail, Crashes and Crises: Lessons from a History of Financial Disasters sheds light on the volatile market of today by looking at mistakes made in risk-taking throughout history. In 24 half-hour lectures that are both gripping and instructive, Professor Connel Fullenkamp of Duke University shares some of the greatest stories of misfortune and malfeasance in history. Full of drama and consequences, these stories open a window into not just financial markets and money-making schemes, but also into our own human tendency to look for quick fixes and easy money.

Monetary Mysteries Cleared Up

An acclaimed economist and award-winning teacher, Professor Fullenkamp has a gift for making the most obscure financial concepts understandable. For example, cryptocurrency is probably near the top of anyone’s list of monetary mysteries. In the very first lecture, Dr. Fullenkamp puts this form of fiat money under the microscope to dissect its purpose, utility for certain kinds of transactions, and inherent risks. While cryptocurrency fills legitimate needs, its novelty and dependence on computer algorithms—not to mention its attractiveness to criminals—make it a very high-risk financial instrument.

In this course, you also investigate a host of other financial phenomena, including these:

Ponzi Schemes: This popular form of fraud existed even before Charles Ponzi gave it a name in his spectacular swindling scheme in the 1920s. Ponzi schemes rely on investors lured by the promise of high returns, with generous payouts at the outset to make the “business” look legitimate—and irresistible. The scam usually collapses as soon as serious suspicions are aroused.

Financial Panics: Once common, panics were typically sparked by a liquidity crisis, when a bank or business ran out of cash, causing panic among depositors or creditors that spread throughout the financial system. Economically ruinous, panics found a cure in the United States only with the adoption of the Federal Reserve System in 1913, followed by deposit insurance and new banking regulations.

Subprime Debt: Mortgage lending to riskier borrowers—called subprime debt—seemed like a good bet in the booming U.S. real estate market in the early 21st century. Unfortunately, innovative financial instruments hid the enormous potential for catastrophe, which began to unfold when borrowers started defaulting in large numbers. The Great Recession of 2007-2009 was the result.

Professor Fullenkamp is candid about the role of economists in some of the disasters. For instance, the subprime mortgage crisis was preceded by several years of what experts called a “Goldilocks economy,” when the United States was enjoying economic growth that wasn’t too hot or too cold, not too fast or too slow, but just right. Economists concluded that, thanks to their wise counsel, the economy was fine-tuned to near perfection. They didn’t look for alternative explanations and thus missed the role of globalization, loose monetary policy, and lax regulation in keeping the U.S. financial system purring happily along. In fact, the economy was like a car that appears to be running nicely, but has fatal flaws that could send it careering into a ditch—which is exactly what happened with the 2007–2009 recession.

Ignorance + Overconfidence = Calamity

Crashes and Crises covers other cases where governments seemed to be following a sensible policy, but pursued it to a calamitous conclusion—as with the hyperinflation that embroiled Germany in the aftermath of World War I. That problem had its beginnings in the widely accepted view that the war would be short and could be financed by borrowing, without raising taxes. And you learn about the misguided investments of Robert Citron, the treasurer of Orange County, California, in the 1990s, who started out profitably enough, but drove the county into the largest-ever U.S. municipal bankruptcy at the time by getting involved with repurchase agreements and inverse floater bonds, which he didn’t understand.

The calamitous mix of ignorance and overconfidence is one of the major themes of these lectures. You may not be responsible for a multi-billion-dollar portfolio—as some of the rogue traders profiled in the course were—but your investments can still end as badly as those of Wall Street pros who thought they knew what they were doing but didn’t.

The Good Old Days

In a fascinating analysis, Professor Fullenkamp explains how we got into our present nerve-wracking era. Anyone who remembers the 1950s and early ’60s may feel nostalgia for the calm and predictable financial markets of that time, when the joke was that bankers followed the “3-6-3 rule”: borrow at three percent, lend at six percent, and be on the golf course by three o’clock. Bank failures were rare during this period, interest rates were low, and stock prices were on a steady rise. But the situation was far from normal, since the country was living through the aftereffects of the Great Depression and World War II, with stringent banking rules designed to prevent another depression and booming U.S. exports due to demand from war-ravaged nations that were rebuilding. It was a convergence of circumstances that could not last—and didn’t.

Crashes and Crises recounts the macroeconomic factors that tipped the United States along with the rest of the world into the current unpredictable and sometimes chaotic state. Professor Fullenkamp notes that this situation is really “back to the future,” since the global economy is now closer to the norm that has prevailed throughout history.

Taking this course can help you be prepared for the next inevitable financial disaster. While some misfortunes will always affect the larger economy, a better understanding of their causes could mean the difference between being a spectator and being a victim.

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24 lectures
 |  Average 28 minutes each
  • 1
    Fintech, Crypto, and the Future of Disaster
    Professor Fullenkamp begins the course with the enormous influence of technology on today’s investing, which brings with it a frightening potential for crashes and crises. Cover the Flash Crash of 2010—a dip in the market that was hugely amplified by programmed trading. Then, delve into the phenomenon of cryptocurrencies such as Bitcoin, which rely on an innovation called blockchain technology. x
  • 2
    The Con Men Charles Ponzi and Ivar Kreuger
    Investigate two of the most notorious con men who ever lived: Charles Ponzi, after whom the Ponzi scheme is named, and “Match King” Ivar Kreuger, who employed an elaborate variant of Ponzi’s swindle. Analyze the three ingredients that most Ponzi schemes share. Above all, learn to identify and be wary of investments that are too good to be true. x
  • 3
    A Boom in Busts
    Contrast the freewheeling financial market of today with the staid system of the immediate post-World War II era. Were financial markets more stable in the past than they are now? How did the present system evolve? What type of market is normal: the steady and predictable kind or the chaotic and sometimes destructive one? In answering these questions, discover why we live in an era of busts. x
  • 4
    The Tulip Bubble
    The 17th-century tulip bubble is a classic case of futures trading run amok. But how much did tulip mania resemble today's speculative markets, as opposed to ordinary gambling? Learn the truth behind this notorious financial bubble, while reflecting on the problem of deciding a fair price for an asset, such as tulip bulbs. Also, consider how bubbles start and end. x
  • 5
    The South Sea Bubble
    Relive the “Wild West” days of the British stock market in the early 18th century, when a financially-strapped government and a public craze for investing created ideal conditions for one of history’s most brazen stock manipulators. Trace John Blunt’s use of the South Sea Company—and bribery—to generate a stock-buying frenzy, making him fabulously rich—until the bubble inevitably burst. x
  • 6
    The Mississippi Bubble
    Delve into the details of the Mississippi bubble, an early 18th-century financial crisis sparked by speculation in the anticipated wealth of French Louisiana. Learn how the bubble’s instigator, John Law, a Scottish gambler and convicted murderer, gained control of the French economy and pushed ideas that were ahead of their time—so far ahead that they plunged France into economic collapse. x
  • 7
    Holes in the Ground: Mining Stock Frauds
    Mining companies were the internet start-ups of the 19th and early 20th centuries, offering a chance to strike it rich—or, more likely, go broke. Focus on the swindling strategy of George Graham Rice, who earned a fortune (and several prison terms) by manipulating mining stock. Discover that Mark Twain and future president Herbert Hoover both had close brushes with shady mining ventures. x
  • 8
    The Panic of 1907
    Until 1920, panics were a recurring feature of economic life in the United States. What caused them and how were they cured? Investigate the Panic of 1907 and the part played by legendary banker J. P. Morgan in stemming a threatened wave of bank failures. The gold standard was an obstacle to managing panics, and the Federal Reserve System, established in 1913, proved to be a powerful antidote. x
  • 9
    Hyperinflation in Germany and Zimbabwe
    Plunge into the economic nightmare of hyperinflation, learning how it happens, when it ends, and the policies that put nations at risk. The classic case of hyperinflation is post-World War I Germany, which faced a multitude of demands on a financial system already crippled by the war. Also, analyze the mistakes that sparked hyperinflation in Zimbabwe in the early 2000s. x
  • 10
    The Crash of 1929
    Dissect the notorious Wall Street crash of 1929, starting with the economic conditions that led to a feverish speculative boom during the “Roaring ’20s.” Survey investment practices of the day, some of which are now outlawed. Trace the rise in stock prices into the fall of 1929, when a normal market correction seemed underway. Probe explanations for why it suddenly turned into a crash. x
  • 11
    The Great Contraction of 1931–1933
    In a financial disaster called the Great Contraction, one-third of all banks in the United States failed between 1931 and early 1933. Examine the causes of this collapse in confidence, which also affected building and loan associations, made famous in the movie It’s a Wonderful Life. Appraise government attempts to stem the crisis, which led to legislation including the Glass-Steagall Act of 1933. x
  • 12
    The Savings and Loan Crisis
    Wade into the quagmire that trapped savings and loan institutions in the 1980s and ’90s. Once a thriving, low-profit source of home mortgages, the industry fell victim to a combination of high interest rates, well-intentioned government deregulation, and a wave of predatory, unscrupulous managers. The ensuing debacle left the American taxpayer with a bill of $160 billion in 1995 dollars. x
  • 13
    The Crash of 1987
    Meet a modern-day Frankenstein’s monster, a human creation on the loose— in this case, computerized trading. Discover how the rage for portfolio insurance controlled by computer algorithms, combined with a rapidly rising market and skittish investors, sparked the Black Monday crash of October 19, 1987, during which the Dow Jones index lost 23 percent of its value. x
  • 14
    Japan's Lost Decade
    In the 1980s, the Japanese economy seemed unstoppable. Then, it came to a screeching halt, miring the nation in more than two decades of economic stagnation. What went wrong? Analyze Japan’s postwar brand of capitalism, focusing on how its regulatory, political, and banking systems created a “bubble economy”—until the global economy and regulatory climate abruptly changed and the bubble burst. x
  • 15
    Bankers Trust Swaps
    Learn the ropes for interest rate swaps, the most popular financial derivative in the world. Then, see how a complex form of swaps, brokered by Bankers Trust in the early 1990s, led to huge losses for some famous corporations and an ensuing round of bitter lawsuits. The case holds lessons for anyone investing in financial instruments that they don't fully understand. x
  • 16
    Asia, Greece, and Global Contagion
    Analyze the cause of currency crises, using the 1997 collapse of the Thai baht as test case. Uncover why such events can happen suddenly with little chance for a government to stop the precipitous fall in its currency's value, and also why the U.S. dollar is not immune. Consider the role of currency speculators, such as George Soros, who famously broke the Bank of England in 1992. x
  • 17
    The Orange County, California, Bankruptcy
    Discover how an elected official with a self-admitted seventh-grade proficiency in math earned fabulous returns as treasurer of Orange County, California, and then plunged the system into the largest municipal default in United States history up to that time. His strategy—and downfall—relied on two financial instruments: repurchase agreements and inverse floater bonds. Track down where he went wrong. x
  • 18
    The Dotcom Bubble
    The rise of the internet in the 1990s spawned companies that existed only online; had never earned a profit; had no rational business plan; and, yet, generated enormous enthusiasm in their initial stock offerings. Learn why the market ignored time-tested standards and suffered the inevitable crash. Focus on the role of intangible assets in the dotcom boom and its aftermath. x
  • 19
    Rogue Traders at SocGen and Barings
    Test Professor Fullenkamp's theory that all rogue traders are the same by studying two infamous insiders: Jerome Kerviel, who cost the French bank Societe Generale more than $6 billion, and Nick Leeson, whose errant trading bankrupted Baring Brothers. Find out how trading firms are organized, and pinpoint the Achilles heel that allowed both men to go rogue. x
  • 20
    Unhedged! Long-Term Capital Management
    Long-Term Capital Management was a hedge fund with everything going for it: well-heeled investors, a dream team of economists and managers, and banks willing to loan hundreds of millions of dollars with no questions asked. In 1998, it all went terribly wrong in a debacle that threatened to take down Wall Street. Spotlight the basic rules of finance that were ignored by LTCM and its banks. x
  • 21
    The London Whale and Value at Risk
    Explore a risk-management tool called value at risk, or VaR. Developed by economists at J. P. Morgan in the 1990s, VaR estimates the largest loss that a given investment strategy can be expected to sustain under normal market conditions. Chart the successes of this model—and its spectacular failure in an incident involving a high-rolling trader nicknamed the “London Whale.” x
  • 22
    The Goldilocks Economy and Three Bads
    In the 1990s and early 2000s, the U.S. economy was enjoying a long spell of economic growth that struck economists as just right. But that was before the “three bads” surfaced: bad monetary policy, bad private-sector behavior, and bad financial regulations. See how self-interest and overconfidence blinded investors, borrowers, and regulators to the financial crisis that exploded in 2007–2008. x
  • 23
    Subprime Debt and the Run on Wall Street
    Inspect the unprecedented run on the international financial system in 2007–2008, which led to the worst recession since the Great Depression. Learn the ins and outs of subprime mortgages, collateralized debt obligations, and structured investment vehicles, which fueled a U.S. housing-construction boom that involved most of the world’s major financial institutions. x
  • 24
    China's Shadow Banks
    China was largely unaffected by the 2007–2009 global economic meltdown. But that doesn’t mean it’s immune to crises. Focus on China’s shadow banking, which is the provision of banking services by non-bank institutions. The practice is not as sinister as it sounds, but it is subject to abuse. In China’s case, the widespread use of shadow banking courts trouble that could lead to financial disaster. x

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Your professor

Connel Fullenkamp

About Your Professor

Connel Fullenkamp, Ph.D.
Duke University
Professor Connel Fullenkamp is Professor of the Practice and Director of Undergraduate Studies in the Department of Economics at Duke University. He teaches financial economics courses, such as corporate finance, as well as core courses, such as economic principles. In addition to teaching, he serves as a consultant for the Duke Center for International Development. Prior to joining the Duke faculty in 1999, Professor...
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Reviews

Crashes and Crises: Lessons from a History of Financial Disasters is rated 4.6 out of 5 by 56.
Rated 4 out of 5 by from Extremely interesting! A good course! Probably to get the most out of it, you'd need a background in finance, but even at that, it's a good discussion of what happened and why, and the long-term effects. A little more details would've made it perfect, but it was definitely worth it!
Date published: 2020-07-26
Rated 5 out of 5 by from Understandable Explanations The lecturer gives understandable explanations for complicated financial situations and actions
Date published: 2020-07-19
Rated 4 out of 5 by from These history lessons still apply today. I happen to like history but I am not too interested in financial matters, but based upon other reviews I decided to buy this course. The professor did a great job of explaining the financial parts in understandable language as well as covering the historical context of the crash/crisis/issue he was covering. He was also good at pointing out common themes and how these themes are still applicable today. So, in the end, I learned a great deal about the history of finance and problems that came up and also gained a better understanding of finance while at the same time learning some lessons that I can use today.
Date published: 2020-06-25
Rated 5 out of 5 by from Excellent Economic Crashes & Crises History Course First, my undergraduate minor was in economics. Second, this course is really an economics history class. Next, economics is not a subject where fantastic graphics can help the presentation, such as astronomy. Fortunately, Professor Fullenkamp is a great presenter. Seldom did I check to see how much longer the lecture had to go. It was immensely helpful that the lecturer sat during 98% of the lecture and didn't do the Great Courses' shuffle on the famous rectangular rug. I had heard of a Ponzi scheme, but now I learned the details behind it. I lived through the 1987 stock market crash, the dot.com bubble, rogue traders at various financial firms, and the Great Recession. Now I received an understanding from hindsight and 50,000 feet above the events. The presentations were very grounded. The end conclusion I gained is that crashes and crises are often caused by 1) hubris, 2) poor character, and 3) any thinking that you can predict the future.
Date published: 2020-06-08
Rated 5 out of 5 by from This is about humans and power. Explosive. This is a historical perspective from the view of an economist. Very interesting.
Date published: 2020-05-24
Rated 5 out of 5 by from Fascinating I found this lecture series to be clear, concise and very detailed. In fairness though, I may not be the average Listener, having been involved in creative finance for my entire career. I believe that the vast majority of the course would be relatively easy to follow for someone with a limited background in finance, though there are clearly some areas that may warrant extracurricular research. There were a few areas (regarding the south sea and Mississippi bubbles) where I had trouble following some aspects of the funding details (as I listened while riding my bike). A good course is one which encourages you to think (and perhaps do a bit of googling to learn more.) This course does that.
Date published: 2020-05-06
Rated 5 out of 5 by from HIGHLY RECOMMENDED Even before the Dot.com bubble and bust, I have been interested in what causes crashes. A couple of good books on the topic include DEVIL TAKES THE HINDMOST, as well as John Galbraith's THE GREAT DEPRESSION. These were very valuable sources for me, someone who has no calculus or statistics background and who has no connection to the financial services industry. Prof. Fullenkamp takes a very effective approach at explaining difficult topics. Obviously, judging from his thumbnail C.V. he has an banking insider's credentials. However he manages to present complicated material without talking down to an audience without his technical background. He does use formulas and graphs, but they are simplified enough that someone with algebra could readily understand the concepts. In THE SOUTH SEA BUBBLE he explains how John Blunt orchestrated a strategy where the financially stressed English government swapped government debt for the company's shares. In The MISSISSIPPI BUBBLE we see how John Law, an English fugitive from justice (a dueling murder) went to France and by 1720 managed to get himself installed as the key figure in French economic policy and administer a complicated scheme swapping government bonds and company IOUs to inflate the money supply as a way out of huge debt from its costly war with Spain. ROGUE TRADERS AT SOCGEN AND BARINGS is fascinating in that the rogues in both cases followed a pattern quite similar to one another. That is, they both worked in the back office until they learned the ins and outs of compliance and reporting. They then moved to the trading floor where they acted on their inside knowledge of how to cover their tracks. They would pyramid and double down on their losses. In UNHEDGED! LONG-TERM CAPITAL MANAGEMENT he takes us through the means by which economist Merriweather managed to "invest" $100 BILLION at 30X hidden leverage! This was achieved by recruiting a Nobel-prize winner, ex-Federal Reserve official, non-existent disclosure and losses so big that it took the Federal Reserve itself to arrange a rescue package. My conclusion at the end of this splendid course is this: it seems to me that if the financial rogues cause enough damage to endanger a big financial institution in which the higher-ups may be involved, their punishment will be light or non-existent. In the cases of Bernard Madoff or Michael Milikin, on the other hand, where they couldn't implicate higher management of a big institution, they would be the ones paying a high price for their misdeeds. Bottom line, I find this view from the inside of large financial institutions very instructive.
Date published: 2020-04-27
Rated 4 out of 5 by from In the Goldilocks zone I just finished the course. I thought that Professor F. did a good job of balancing content between technical theory and story content. He kept it interesting and informational for the layman. His summation at the end of each lesson helped make concrete the mistakes and behavior that led to the crisis. I think the course could have been improved by a final lecture that pulled all the crises together to identify the warning signs, and how this could help the individual who is investing.
Date published: 2020-01-03
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