Economic Troubles on the Horizon Things Aren’t as Good as They Appear to Be!

Economic Troubles on the Economic Troubles on the HorizonHorizon

Things Aren’t as Good as They

Appear to Be!

Signs of TroubleSigns of TroubleMajor Industries in Trouble: -- RR vs. -- Coal Mining vs. -- Lumber Co.’s

Farmers in Trouble: -- Post WWI: crop prices -- grow more crops = prices more! -- Can’t pay debt to banks -- Banks seize farms and equipment

Consumers:

-- Buying less b/c of rising prices, stagnant wages

-- overbuying on credit (installment plan) = DEBT!

Uneven Distribution of wealth:

-- widening income gap

Signs of TroubleSigns of Trouble

Uneven Income Distribution, 1929

- Over $10,000 = 0.1% of population- 80% of families have no savings

TODAY: The poorest 90 percent of Americans make an average of $31,244 a year, while the top 1 percent make over $1.1 million:

According to this chart, most income groups have barely grown richer since 1979. But the top 1 percent has seen its income nearly quadruple:

And this chart suggests most Americans have little idea of just how unequal income distribution is; they'd like things to be divvied more equitably:

Herbert Hoover Elected Pres., 1928Herbert Hoover Elected Pres., 1928 • Laissez-Faire Republican President

• Why elected?- Continue the prosperous 1920s!

“We in America are nearer to the final triumph over poverty than ever

before.”

Party On!

Stock Market = Riches?Stock Market = Riches?* By 1929, 4 million Americans own stock (3% of pop.)

* Speculation: buying risky stocks & bonds to make a quick profit

* Buying on margin: Paying a small % of a stock’s price as a down payment and borrowing $ for the rest. An “installment plan” for stocks.

The Stock Market Crashes: The Stock Market Crashes: Oct. 29, 1929, “Black Tuesday”Oct. 29, 1929, “Black Tuesday”

• Stock market plunges on Oct. 24th

• Oct 29th: 16.4 million shares “dumped”

• People who had bought on margin now

had a huge debt

● Others lose their life savings (no ins.)

● Total investments lost = $30 billion ( = to cost of WWI)!

Financial CollapseFinancial Collapse

• Banks and other businesses go bankrupt

- By 1933 11,000 of 25,000 banks had collapsed

● 1929- 1932: 90,000 businesses go bankrupt- Gross Nat’l Product (U.S.’ total output of goods & services) is almost cut in ½

● Unemployment rises drastically-1929 = 3% unemployment rate (1.6 mill. pple)

-1933 = 25% unemployment rate (13 mill. pple)

Gov’t Reaction: Hawley-Smoot Tariff ActGov’t Reaction: Hawley-Smoot Tariff Act• highest tariff in U.S. history

• designed to protect American farmers and manufacturers– plan actually backfired

• Worldwide trade drops 40%

Causes to The Great Depression

• Tariffs lower world trade

• A crisis in the farm sector & other industries.

• The availability of easy credit = debt.• An unequal distribution of income.

Please Answer the Following Questions Below Your Notes

• 1. What were the signs of financial trouble during the 1920s?

• 2. Who was president during the crash of the Stock Market and why had he been elected?

• 3. How did speculation and buying on the margin contribute the Crash of ’29?

• 4. What were the effects of the Crash?

• 5. Explain the causes of the Great Depression in your own words.

Today’s Crisis

• Please watch the video and be ready to discuss the questions & situation after…

• Pay close attention please

Questions: Please copy ?s and answer as you watch the video

• 1. Why do investors stop buying treasury bills from the Federal Reserve?

• 2. How does lowering the federal interest rate effect credit?

• 3. Explain Collateralized Debt Obligations (CDOs)

• 4. Explain Credit Default Swaps

• 5. Explain Sub-Prime Mortgages

• 6. Explain Frozen Credit Markets

Homeowners

Mortgages (loans) on Houses

“Main St.”

Investormoney

Institutions (mutual funds, pension funds, insurance

co.’s)

Financial systems

Banks, brokers

“Wall St.”