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?

  • The history of bank panics and how they were (mostly) cured.
  • How subprime mortgages sparked the Great Recession.
  • 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 4.7 out of 5 by 10.
Rated 5 out of 5 by from Informative The Professor did a great job on keeping my interest all throughout the course. I really highly recommend this course. I love history.
Date published: 2018-09-12
Rated 4 out of 5 by from Title correctly states what the course covered. The insights of the professor on the past financial crashes was an eye opener and new to me.
Date published: 2018-09-06
Rated 5 out of 5 by from Great course. I am an economics major. I wish I had more instructors like this one. I have studied and worked through a number of these crises and this is very good presentation of them. Get this one, worth the cost!
Date published: 2018-09-05
Rated 5 out of 5 by from Excellent content. Professor Fullenkamp is a great teacher who is obviously an expert in his field.
Date published: 2018-09-04
Rated 5 out of 5 by from Fascinating and thought provoking course This course was fascinating! Professor Fullenkamp was able to describe in quite technical terms the mechanisms that led to many of the famous crashes – fiascos – crises, in a way that is accessible even to people with limited background in economics or finance. The lectures are composed of case studies and usually focus on the underlying financial mechanisms that allowed each particular crisis to ripen, and on the key personas that were involved – be it a form of fraud, regulatory oversight, corruption, or just bad luck. Seeing the full survey of these cases, one gets frustrated at seeing how at the bottom line – in many of hte lectures it’s a simple case of huge economic institutions making very risky bets, and it’s the tax payers who had to bail them out and pay the price. Of course, everyone knows this general outline - but getting the finer, vivid details was both fascinating and aggravating at the same time. Professor Fullenkamp’s delivery was fantastic: he was clear, well-structured, and entertaining, and his explanations made the non-trivial material readily accessible. I say readily accessible and not easily accessible, because the material is not trivial and requires substantial concertation and motivation from the receiving party in order to fully understand it – but it is possible in my opinion. I do have some financial background from and MBA program I took a few years ago, but as I said, anyone willing to put in an effort should be able to understand the lectures quite thoroughly. At the end of the day, these are just really great and wonderfully told stories, and everybody likes a good story.
Date published: 2018-09-03
Rated 5 out of 5 by from One of the Very Best Lecture Series in the Library Very entertaining and informative Course. Highly recommended.
Date published: 2018-09-02
Rated 5 out of 5 by from Excellent Course Great learning experience, the high level of detail that is explained in a very understandable way with the actual chronology of how the crashes and crisis occurred was terrific!!! I highly recommend this course!
Date published: 2018-08-31
Rated 5 out of 5 by from A cogent story of history’s worst financial crises Dr. Fullenkamp is an excellent lecturer with a very precise delivery. The case studies of financial crises that he draws on are presented in great detail with careful analysis, narrated with a dramatic flair. While almost all the lectures are worthy of comment, I offer just a few specifics that struck me as especially noteworthy. In the lecture on Ponzi schemes, the professor sites two examples including the eponymous Ponzi for whom the scam is named, but omits any reference to the far more recent Bernie Madoff investment scandal, where money from new investors was used to pay off old investors, instead of being paid from actual earnings. The Ponzi lesson: beware of guaranteed overly high returns, paid regardless of market conditions. The three investment bubbles described in the 1600s and 1700s (Tulip, South Seas and Mississippi) were all short-lived and failed because of precipitous rises in value, fueled largely by unsophisticated investors buying on credit with low down payments. Some degree of government involvement was falsely assumed to mean that the ventures would not be allowed to fail. Lectures on the 1929 stock market crash and the bank failures of the early 1930s explain the vulnerability of financial institutions, especially small rural banks during this period. Many failed, including some relatively healthy institutions because of the spreading contagion of bank runs, where depositors withdrew all their funds in panic. This disastrous experience soon after gave rise to remedies including the famous regulatory Glass-Steagall Act and the creation of the FDIC, insuring all bank deposits. From the standpoint of understanding financial crashes from the historical perspective, I found the first half of the course of greater interest than the second, with the exception of the Dr. Fullenkamp’s masterful coverage of the recent sub-prime mortgage debacle that plunged the country and the world into a deep recession. He points out how the resulting complex financial manipulations closely resembled classic old-time bank runs, where only massive intervention by the Fed prevented greater defaults following the failure of Lehman Brothers in September, 2008. There are a few stylistic differences in this course as compared to other recent Great Course releases. I prefer to buy the video version of most courses to take advantage of the maps, photos and other illustrations offered. For this course, however, the audio version is more than adequate, given the paucity of visuals and the excellent lecturing skill of the professor. The course set is dark and austere, free of the imaginative props that adorn the backdrop of many other recent Great Courses, perhaps intended to reflect the seriousness of the subject matter. The well-dressed professor appears standing at the beginning and end of each lecture to present a brief introduction or conclusion, but otherwise remains seated on a high stool to deliver his lectures (a concession with which those of us who experience lower back pain from constant standing can sympathize). This course should be of interest to a wide audience, both within and outside the world of business and finance. I have had some training in economics and hold a decades-old MBA, but while I have never worked directly in the financial field, I found the course highly informative. Dr. Fullenkamp's narrative is remarkably clear, and his treatment of complex economic and financial issues is basic enough for those in his audience with limited economic background to understand, or at least follow the main themes. At the same time, his careful analyses also provide an excellent summary of the various political, economic and financial factors that have combined to cause a variety of financial crashes and crises over the past few centuries, with real-life lessons and reminders to current business and government practitioners in the financial field on how to avoid these pitfalls in the future.
Date published: 2018-08-26
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