Lessons from History: Stock Market Crashes

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Lessons from History Stock Market Crashes

• Presenter Dr. Sue Lynn Sasser
• Source Learning, Earning and Investing
• published by the National Council on
  Economic Education

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Concepts

• Causes and effects of stock market crash in 1929
• Causes and effects of stock market crash in 1987
• The role of the Federal Reserve and monetary
  policy

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Objectives

• Develop and present posters about the crashes
• Compare the two crashes
• Explain the Feds role and how is contributed to
  different outcomes in the two crashes

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Materials

• Copies of the information sheets
• 8 large pieces of construction paper or butcher
  paper
  
• 3 or 4 markers for each group of students

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What is a stock market crash?

• Stock prices drop A LOT!
• Price drops are sudden and unexpected
• Crashes create panic
• People lose money they have invested in stocks

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U.S. Stock Market Crashes

• October 1929

• October 1987

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Questions

• How were the causes of the 1929 crash similar to
  the causes of the 1987 crash?
  
• Why did many people sell their stock at the same
  time?

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• What happened after the 1929 crash, compared to
  what happened after the 1987 crash?

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• How did the Fed react to the two crashes?

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• Given what happened in both crashes, do you think
  there will be additional crashes in the future?

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An economic perspective

• Economists agree that supply and demand forces
  may lead to future crashes because stock market
  prices are based, in great part, on
  expectations.
• When investors believe stock prices will
  increase, it increases the demand for stocks.

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• This increased demand continues until stock
  prices become too high for the value of the
  related corporation.
  
• Over valued stocks create market situations
  called speculative bubbles and bubbles can
  burst!
  
• Bubbles burst when investors expect prices to
  stop increasing.

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• Over valued stock prices result in excess
  supply of stocks, which causes prices to fall.
  The greater the perceived over value, the greater
  the fall.
• When investors decide to leave the market at the
  same time, little can be done to prevent the
  markets from falling.

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Review

• How did Fed policy help create the Great
  Depression after the stock market crash in 1929?
  
• How did Fed policy help prevent a recession after
  the stock market crash of 1987?

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For more information on this lesson.

• Go to http//lei.ncee.net
• Or, attend a Learning, Earning and Investing
  workshop
  
• www.econisok.org

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Contact information

• Dr. Sue Lynn Sasser
• Executive Director
• Oklahoma Council on Economic Education
• 100 N. University Drive, Box 103
• Edmond, OK 73034
• 405.974.5627
• ssasser_at_ucok.edu