The StockMarket Game is a curriculum-based teaching tool that allowsstudents to invest a hypothetical $100,000 online stock portfolio tolearn about long-term saving and investing.
Despite the passage of the Wall Street rescue bill, the bears werehunting stocks this week and it appears they've fattened up nicely forwinter.
The financial contagion spread to Europe and Asia, which helped pushthe
down as much as 800 points during Monday's session. The rest of theweek didn't get any better for the index or for the
.Friday morning, stocks nosedived, but with minutes to go before thebell, the Dow was in mildly positive territory. (Don't miss "
WhipsawDay Caps Dow's Worst Week Ever") The market's looking for abottom, but forced selling from
hedgefund liquidations is making this difficult. In the
, traders will face a slew of earnings reports, along with continue uncertainty about the financial system.
Fasten your seat belts folks; it will continue to be a bumpy ride.
joined forces and issued a coordinated rate cut onWednesday. Through various other means the
and other central bankers have been pumping
liquidityinto the system, effectively throwing life preservers to the world'sbanks. All these actions are designed to get banks to lend to eachother again. So far, however, the banks are still reluctant to holdhands. This has left interbank lending frozen. Let's explore whythat's important.
On any given day, banks have either a surplus or deficit of cash.Normally, banks with a surplus will make a short-term loan to bankswith a deficit. This lending allows banks with a short-term deficit tohave enough money to continue lending to the public. Normally,billions of dollars change hands between banks every day. That lendinghas stopped. Banks no longer trust that the bansk they lend to willbe able to pay them back. When that lending stops, banks "hoard cash,"which effectively means banks slow down or cease lending to thepublic. So, why does that affect you and your students?
This is what happened in the Great
Depression.If you're a business (or the government of California), you may have$1 million in accounts receivable (that's money people owe to you)but not enough in the bank to pay your employees this week. In normaltimes, you simply access a short-term loan from the bank and pay thebank back when the receivables come in. It's like a student who getsher allowance on Friday and borrows from another student to buy lunchon Thursday with a promise to pay it back the next day. It's borrowingmoney on the prospect of future income.
However, if you're a business and can't gain access to that credit, you can'tmake payroll. This forces you to lay people off. When you lay peopleoff, they can't pay their mortgages. When people realize theirneighbors aren't paying their mortgages, they know the bank is introuble so they rush to get their money out of the bank all at once --this is called a "run on the bank." But as George Bailey explained inthe Hollywood classic
It's a Wonderful Life
, most of the bank'smoney isn't sitting in the bank. It's invested in your neighbor'shome, your neighbor's business, and so on. So when people stage a "run on thebank," the bank doesn't have their money, which causes the bank tofail.
This process is referred to as a negative feedback loop, a chainreaction, or more ominously, a meltdown. Right now, what we have onour hands is Three Mile Island. What the U.S. Federal Reserve, theU.S. Treasury and governments around the world are trying toprevent is Chernobyl. We'll all have to wait and see when and if theyget it right.
In the meantime, a great explanation of how this credit crisis beganis available in SMG's "In the News" newsletter entitled "CreditShards." There's also a lesson called, "What is Risk?" that discussesthe Great Depression. Both are available in the
On a lighter note, the holiday season is just around the corner and
ChristmasPrice Index will be available on Dec. 1. The Web site reviewsthe cost of the gifts in the song, "The Twelve Days of Christmas."It's a great tool to help students learn about
inflationand the broader economy, and SMG has a project in the
Teacher SupportCenter to help you use it in the classroom. SMG will hold aWebinar on Nov. 5 at 4:00 p.m. to review the 2008 data and the SMGlesson. All you need to participate is Internet access and a phone.You can register for the Webinar right now. We hope you will join us.
To learn more about The Stock Market Game, visit www.stockmarketgame.org.
This article was written by a staff member of The Stock Market Game.