Table Of ContentTopic Subtopic
Learn the lessons of history’s greatest financial scams and disasters as an award-
winning economist guides you through four centuries of financial mishaps. Economics & Finance Economics
Crashes and Crises
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—Harvard Magazine s
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“Passionate, erudite, living legend lecturers. Academia’s d of Financial Disasters
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—The Los Angeles Times s
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“A serious force in American education.”
—The Wall Street Journal
Professor Connel Fullenkamp
Duke University
Connel Fullenkamp is a Professor of the Practice of
Economics and the Director of the Economics Center for
Teaching at Duke University. His many scholarly awards
include a National Science Foundation Graduate Research
Fellowship for his studies at Harvard University and Duke
University’s Alumni Distinguished Undergraduate Teaching
Award. In addition to his academic work, Professor
Fullenkamp is a sought-after consultant who works with the
International Monetary Fund to train central bankers and
other government officials around the world.
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Connel Fullenkamp, PhD
Professor of the Practice of Economics
Duke University
Connel Fullenkamp is a Professor of the Practice of Economics at Duke
University, where he also serves as the Director of Undergraduate Studies
for the Department of Economics and the Director of the Economics
Center for Teaching. He teaches core economics courses, such as Economic
Principles, as well as financial economics courses, such as Corporate Finance.
Before joining the Duke faculty in 1999, Professor Fullenkamp was a faculty
member in the Department of Finance at the University of Notre Dame’s
Mendoza College of Business.
Professor Biography i
Professor Fullenkamp was named a Presidential Scholar by the US Department of
Education before earning his BA in Economics from Michigan State University.
In addition to receiving the Harry S. Truman Scholarship, he was named one
of the university’s Alumni Distinguished Scholars. He earned his MA and PhD
in Economics from Harvard University, where he also was awarded a National
Science Foundation Graduate Research Fellowship.
Professor Fullenkamp has published articles on topics such as financial market
development and regulation, the economic and policy implications of risk sharing,
and the economic impact of immigrant remittances. His work has appeared in
a number of prestigious academic journals, including the Review of Economic
Dynamics, the Cato Journal, and the Journal of Banking and Finance. Along
with Sunil Sharma, Professor Fullenkamp won the third annual essay contest
on financial regulation sponsored by the Financial Times and the International
Centre for Financial Regulation; their paper was entitled “Good Financial
Regulation: Changing the Process Is Crucial.” His other publications include
“Financial Regulation and the Speed of Financial Risks” and “Reconsidering
Bank Capital Regulation.”
Professor Fullenkamp also does consulting work for the International Monetary
Fund (IMF) Institute for Capacity Development, training government officials
around the world. He is a member of the IMF Institute’s finance team, whose
purpose is to train central bankers and other officials in financial market
regulation, focusing on derivatives and other new financial instruments. He is
also an educational consultant to The New York Times.
In recognition of his teaching excellence, Professor Fullenkamp has received
Duke University’s Alumni Distinguished Undergraduate Teaching Award as well
as the University of Notre Dame’s Mendoza College of Business Outstanding
Teacher Award.
Professor Fullenkamp’s other Great Courses are Understanding Investments;
Financial Literacy: Finding Your Way in the Financial Markets; and The
Economics of Uncertainty. ■
ii Crashes and Crises: Lessons from a History of Financial Disasters
TABLE OF CONTENTS
iNTRODUCTiON
Professor Biography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
Course Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
GUiDES
Lecture 1 • Fintech, Crypto, and the Future of Disaster . . . . . . . . . . . . . . . . . . . 3
Lecture 2 • The Con Men Charles Ponzi and Ivar Kreuger . . . . . . . . . . . . . . . . . 14
Lecture 3 • A Boom in Busts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Lecture 4 • The Tulip Bubble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Lecture 5 • The South Sea Bubble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Lecture 6 • The Mississippi Bubble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Lecture 7 • Holes in the Ground: Mining Stock Frauds . . . . . . . . . . . . . . . . . . 65
Lecture 8 • The Panic of 1907 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Lecture 9 • Hyperinflation in Germany and Zimbabwe . . . . . . . . . . . . . . . . . . 87
Lecture 10 • The Crash of 1929 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Lecture 11 • The Great Contraction of 1931–1933 . . . . . . . . . . . . . . . . . . . . . . 110
Lecture 12 • The Savings and Loan Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Lecture 13 • The Crash of 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Lecture 14 • Japan’s Lost Decade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Lecture 15 • Bankers Trust Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Lecture 16 • Asia, Greece, and Global Contagion . . . . . . . . . . . . . . . . . . . . . 162
Lecture 17 • The Orange County, California, Bankruptcy . . . . . . . . . . . . . . . . . 174
Lecture 18 • The Dotcom Bubble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Lecture 19 • Rogue Traders at SocGen and Barings . . . . . . . . . . . . . . . . . . . . 196
Lecture 20 • Unhedged! Long-Term Capital Management . . . . . . . . . . . . . . . . 207
Lecture 21 • The London Whale and Value at Risk . . . . . . . . . . . . . . . . . . . . . 219
Lecture 22 • The Goldilocks Economy and Three Bads . . . . . . . . . . . . . . . . . 230
Lecture 23 • Subprime Debt and the Run on Wall Street . . . . . . . . . . . . . . . . . 241
Lecture 24 • China’s Shadow Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253
SUPPLEMENTARY MATERiAL
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262
Image Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278
iii
DiSCLAiMER
The financial information provided in these lectures is for informational purposes
only and not for the purpose of providing specific financial advice. Financial
investing carries an inherent risk that you will lose part or all of your investment.
Investors must independently and thoroughly research and analyze each and
every investment prior to investing. The consequences of such risk may involve,
but are not limited to: federal/state/municipal tax liabilities, loss of all or part of
the investment capital, loss of interest, and contract liability to third parties, and
other risks not specifically listed herein. Use of these lectures does not create
any financial advisor relationship with The Teaching Company or its lecturers,
and neither The Teaching Company nor the lecturer is responsible for your use
of this educational material or its consequences. You may want to contact a
financial professional to obtain advice with respect to any specific financial
investing questions. The opinions and positions provided in these lectures reflect
the opinions and positions of the relevant lecturer and do not necessarily reflect
the opinions or positions of The Teaching Company or its affiliates. Pursuant
to IRS Circular 230, any tax advice provided in these lectures may not be used
to avoid tax penalties or to promote, market, or recommend any matter therein.
The Teaching Company expressly DISCLAIMS LIABILITY for any DIRECT,
INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES
OR LOST PROFITS that result directly or indirectly from the use of these
lectures. In states that do not allow some or all of the above limitations of
liability, liability shall be limited to the greatest extent allowed by law.
iv Crashes and Crises: Lessons from a History of Financial Disasters
CRASHES AND CRiSES:
LESSONS FROM A HiSTORY
OF FiNANCiAL DiSASTERS
This course presents a history of financial disasters—crashes, crises, panics,
and scandals that have occurred since the early 1600s. Lectures not only
explain why and how these disasters happened, but also introduce you
to the people behind many of these events. You will meet John Blunt, whose
ambition fueled the South Sea bubble, and John Law, who created the Mississippi
bubble when he persuaded the French government to put his untested theories
about money into practice. You will also learn about the key role that carousing
in taverns played in creating the Dutch tulip bubble.
The course introduces you to some of history’s greatest swindlers. You will meet
Charles Ponzi, whose fake investment fund conned all of New England, and Ivar
Kreuger, the original international man of mystery whose misdeeds inspired
Congress to rewrite the securities laws. You will also meet George Graham
Rice, a Wall Street operator whose mining stock scams spanned 3 decades. You
will learn how reckless bankers, such as Michael Wise at Silverado and Charles
Keating at Lincoln, represented the worst excesses that caused the savings and
loan crisis. And you will be introduced to modern rogue traders: Jérôme Kerviel
at the French bank Société Générale; Nick Leeson, who bankrupted Barings
Bank; and Bruno Iksil, who became notorious as the London Whale.
The course highlights how governments also cause financial meltdowns. You will
learn how runaway government spending was at the root of hyperinflations in
Germany during the 1920s and in Zimbabwe during the mid-2000s. Government
spending is also a main culprit behind the currency crashes that have rocked
Thailand, Mexico, and many other economies. Several lectures demonstrate
how bank regulations have backfired on numerous occasions, leading to crises.
For example, regulations intended to protect the banking system actually led to
the panic of 1907. In Japan, paternalistic supervision of the banking industry
resulted in a so-called bubble economy that caused a decades-long banking and
economic crisis when it collapsed. On the other hand, government hesitation and
inaction stoked a nationwide banking panic in the early 1930s that economists
Milton Friedman and Anna Schwartz called the Great Contraction.
Course Scope 1
One of the main messages of the course is that crashes and crises are actually
part of the normal functioning of the financial markets. In fact, you will learn
why the calm financial markets that many people grew up with were a historical
exception and the “boom in busts” that began in the 1980s was actually a return
to the historical norm. Several lectures exhibit how financial innovations lead
to overoptimistic and opportunistic responses that in turn lead to crashes and
crises. For example, the innovations in technology that led contemporaries to
call the 1920s the “new era” also fueled a stock price bubble that famously
crashed in October 1929. This pattern repeated itself in the 1990s, when the
“new economy” associated with the commercialization of the internet led to
the dotcom bubble. Financial innovation, in the form of computerized portfolio
insurance, also played the leading role in the stock market’s crash of 1987.
You will also learn how aggressive financial managers pushed innovative
products and ideas too far, leading to huge losses. Companies such as Procter
& Gamble lost millions on interest rate swaps created by Bankers Trust. Robert
Citron, the manager of the Orange County investment pool, made—and then
lost—hundreds of millions of dollars gambling on interest rates using repurchase
agreements. And John Meriwether, a calculating arbitrageur, nearly caused
a global financial crisis in 1998 when reality trumped the models driving his
Long-Term Capital Management hedge fund.
You will also learn how all these factors—human nature, governments, and
innovation—came together to cause the greatest financial panic in 2 generations:
the subprime mortgage meltdown. The lessons that this course draws from the
history of financial disasters are also used to determine where future crashes
and crises are likely to originate. The final lecture considers whether China’s
rapid financial development, which relies on institutions commonly called
shadow banks, could lead to crisis. And technological innovations, including
cryptocurrencies and high-frequency trading, are evaluated for their potential
to cause tomorrow’s financial meltdowns. ■
2 Crashes and Crises: Lessons from a History of Financial Disasters
FINTECH, CRYPTO,
AND THE FUTURE
OF DISASTER
LECTURE 1
Crashes and crises are a normal part of financial activity. Technology may
have the potential to reduce, or even prevent, some financial disasters by
improving the amount of information available to investors and regulators,
but it also creates new ways for people to push the financial system beyond
its limits. The human desire to pursue big payoffs will always be the driving
force behind financial innovation—and financial disasters. The balance we
need to strike is between allowing people to chase these big payoffs through
experimentation and innovation while limiting the damage from the recurring
crashes and crises that result from it.
3
FiNANCiAL TECHNOLOGY
b Crashes and crises will always be a part of the financial markets. They
always have been. And we might be able to prevent some disasters, or at
least lessen the damage, if we try to anticipate where, and why, the next one
will take place.
b One likely source of a future financial crisis is technology. It shapes nearly
every financial activity—from taking a photograph of a check to deposit
it to lending money directly to another person via smartphone app. But
technology will most likely not become a leading cause.
b Instead, one thing that all financial traumas have in common is the human
factor: the decisions that people make. Technology might amplify the
consequences—and even empower new decisions that are more dangerous
than before—but technology is a tool for carrying out human decisions. And
it is human nature for people to make bad decisions, over and over again.
b Sometimes, greed or bad incentives are at the root of these crises.
Sometimes, people make the best decisions they can and the decisions
add up to a calamity, as in the case of portfolio insurance causing the
stock market crash of 1987. Furthermore, because of cognitive biases, it’s
possible that people will make bad choices yet be convinced they’re doing
the right thing.
b One way that technology could make future crashes and crises even more
likely is with the electronic systems that people use to trade financial
assets. Two main innovations in trading systems make future crises more
likely. The first of these is the expansion of trading systems across space
and time.
b Although electronic trading systems have been around for about a half
a century, it’s been within the past few decades that society completed a truly
global system that trades virtually any asset at any time of day.
b The arrival of 24/7 trading vastly increased the global pool of investors. And
it’s been accompanied by the huge growth of private fund managers that offer
mutual fund and pension fund investments to individual investors. These
broad trends have been good for individual investors so far, but the chances
of massive runs and market crashes have also increased.
4 Crashes and Crises: Lessons from a History of Financial Disasters
