Stock Market Game Week in Review

The Stock Market Game is a curriculum-based teaching tool that allows students to invest a hypothetical $100,000 online stock portfolio to learn about long-term saving and investing.

It was a historic week as President Obama took office and hit the ground running on a number of fronts, but stocks continue to languish in the subprime doldrums. Wall Street is waiting for clear direction on the policies regarding the second round of TARP money and the shape of regulations it knows are coming its way.

New York Fed President Tim Geithner tiptoed past his tax problem this week and will likely be confirmed by the Senate on Monday, Jan. 26. In a letter to Senator Carl Levin, Geithner stated that there needs to be more regulation of derivatives and hedge funds and that the regulatory system needs sweeping changes. In similar news, FINRA CEO, and distinguished InvestWrite judge, Mary Schapiro was confirmed as Chair of the SEC Thursday and has promised to "take the handcuffs off" the SEC's enforcement division. The Dow has given up all of its early 2009 gains and has been bumping along the 8,000 level all week with no clear trend in site, except the ever present trend of banks struggling on government life-support. (Don't miss " Stocks End a Rollercoaster Week Mixed" and " Coming Week: More Data, More Trouble")

Speaking of banks, there was much talk this week of creating a government-run "bad bank" to buy up the banks' toxic assets and shore up their balance sheets. This is essentially how the government cleaned up the savings and loan crisis after the last real estate bubble burst in the late 1980s.

In 1989, Congress passed legislation that led to the creation of the government-owned Resolution Trust Corporation (RTC), which purchased impaired mortgage and real estate assets and sold them to the private sector. This was only a scant $400 billion problem, but the RTC managed to stabilize the banking system and the government ended up losing only $124 billion in the process. The government accomplished this with some complex transactions you can read about, and some economists are arguing for this approach now. Others (there are always others) argue that a bad bank approach won't work because the subprime mortgage instruments that are giving the global financial systems ulcers (and possibly worse) are too large and too complicated to price accurately. We'll keep an eye on the situation for you during the course of the semester.

So what does all this have to do with SMG? Lots.

Many market experts we've been listening to feel that the stock market is going to be flat or even fall further in the first two quarters of this year, because of the shaky banking situation. Consequently, many of them are recommending high quality corporate bonds, many of which are paying 8-9% interest. These bonds may also see some price appreciation if markets stabilize.

Those of you in local programs that have access to SMG's bond trading function may want to recommend a position in bonds for your students if you think the experts make sense. To introduce bonds, you can access SMG's "What is a Bond?" lesson plan in the Teacher Support Center.

If you don't have access to bonds, research is going to be the key this semester. Get your students started with the SMG lesson "What Causes Stock Prices to Change?," which is also available in the Teacher Support Center.

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.

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