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Economic history Flashcards

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1
Q

What is quantitative easing?

A

Quantitative easing is a monetary policy where a central bank buys government securities to increase money supply and encourage lending and investment.

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2
Q

What led to the 2008 financial crisis?

A
  • Subprime Mortgage Crisis: Widespread issuance of high-risk mortgages to borrowers with poor credit, leading to a wave of loan defaults.
  • Financial Product Complexity: Heavy investment in complex and risky financial products like mortgage-backed securities and derivatives, which many investors and institutions didn’t fully understand.
  • Lax Financial Regulation: Insufficient regulation of the banking and finance sector, particularly in mortgage lending and the creation of complex financial products.
  • Housing Bubble Burst: A significant and rapid decline in housing prices after a period of unsustainable growth, leading to a collapse in the value of securities tied to real estate pricing.
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3
Q

Describe the dot-com bubble

A
  • Period of the Bubble: The Dotcom Bubble occurred roughly between 1995 and 2001, peaking in March 2000.
  • Rapid Growth and Overvaluation: Marked by excessive speculation in internet-related companies, leading to extreme overvaluation of stocks.
  • NASDAQ Peak and Fall: The NASDAQ Composite Index, heavily laden with tech stocks, peaked at over 5,000 in March 2000. By October 2002, it had fallen by about 78%, dropping to around 1,114.
  • Collapse of Dotcom Companies: Many internet-based companies, or “dotcoms,” failed, leading to substantial financial losses for investors and a broader economic downturn.
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4
Q

When was oil first discovered and commercially drilled in the U.S.?

A

The first commercial oil well in the U.S. was drilled by Edwin Drake in Titusville, Pennsylvania, in 1859, marking the beginning of the modern petroleum industry.

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5
Q

How did the 1973 OPEC oil embargo affect global oil prices?

A

The embargo, initiated by Arab oil producers in response to U.S. support for Israel during the Yom Kippur War, quadrupled global oil prices and led to a major energy crisis in the West.

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6
Q

What was the impact of the 1979 Iranian Revolution on oil prices?

A

The Iranian Revolution caused a significant disruption in oil supplies, leading to a doubling of oil prices and contributing to the global economic downturn of the early 1980s.

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7
Q

What was the cause and impact of the 1990 oil price shock?

A

The 1990 oil price shock was triggered by Iraq’s invasion of Kuwait. It caused a short-term spike in oil prices and fueled concerns about the stability of global oil supplies.

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8
Q

How did the development of hydraulic fracturing (‘fracking’) technology in the 21st century impact the oil industry?

A

Fracking technology led to a boom in U.S. oil production, turning the U.S. into one of the world’s largest oil producers and significantly influencing global oil markets.

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9
Q

What was the impact of the 2020 COVID-19 pandemic on oil prices?

A

The pandemic led to a historic plunge in oil demand, with prices briefly turning negative in April 2020 due to oversupply and storage capacity issues.

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10
Q

What was the role of Standard Oil in the history of the oil industry?

A

Founded by John D. Rockefeller in 1870, Standard Oil became the world’s first and largest multinational corporation, dominating the oil industry before being broken up in 1911 due to antitrust laws.

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11
Q

What was the highest oil price and when did it happen?

A

$147 in July 2008

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12
Q

When and where did Tulip Mania happen?

A

Holland 1634-7

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13
Q

How much did tulips sell for at their height?

A

Single tulip bulbs sold for more than 10 times the annual income of a skilled artisan

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13
Q

What was the first financial bubble?

A

Tulip Mania

Holland, 1634-7

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14
Q

What were the main causes of the 1929 Stock Market Crash?

A
  • Speculative Bubble: Rampant speculation led to inflated stock prices far exceeding intrinsic values.
  • Buying on Margin: Widespread practice of buying stocks on margin (with borrowed money) created a fragile financial setup.
  • Overproduction: Industries produced more goods than the market could consume, leading to falling profits.
  • Bank Failures: Lack of federal insurance for bank deposits led to bank runs and failures, reducing consumer spending and investment.
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15
Q

What was the Nixon Shock of 1971?

A

The Nixon Shock was a series of economic measures undertaken by President Richard Nixon, including the unilateral cancellation of the direct convertibility of the United States dollar to gold, effectively ending the Bretton Woods System.

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16
Q

What is the Latin American debt crisis of the 1980s?

A
  • Widespread Financial Crisis: A period in the 1980s where Latin American countries faced severe economic distress due to their inability to repay large amounts of external debt.
  • Triggered by Mexico’s Default: It began with Mexico’s declaration of inability to service its international debt in 1982, which had a domino effect on other countries in the region.
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17
Q

What caused the Latin American debt crisis of the 1980s?

A
  • Heavy Borrowing in the 1970s: Latin American countries borrowed extensively from international creditors during the 1970s to fuel development and growth.
  • Rise in Global Interest Rates: In the early 1980s, interest rates rose sharply, particularly in the United States, increasing the debt repayment burden for these countries.
  • Decline in Commodity Prices: Many Latin American economies relied on commodity exports. Falling commodity prices reduced their income, making it difficult to service debts.
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18
Q

What and when and why was the highest interest rate in the USA?

A

The fed funds rate reached a high of 20% in 1980 to combat double-digit inflation.

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19
Q

What happened on Black Wednesday?

A
  • Date: Black Wednesday refers to September 16, 1992.
  • Currency Crisis: The UK government was forced to withdraw the Pound Sterling from the European Exchange Rate Mechanism (ERM) due to its inability to keep the pound above its agreed lower limit.
  • Soros’ Speculation: Investor George Soros famously speculated against the pound, contributing to its devaluation.
  • Financial Impact: The UK Treasury estimated losses at £3.3 billion from defending the pound, while Soros’s profit was over £1 billion.
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19
Q

When was the first worldwide depression?

A

The Long Depression, in 1873-96, was a worldwide price and economic recession, considered the first international depression.

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20
Q

What was the significance of the Bretton Woods Conference in 1944?

A

The conference established a new international monetary order, creating the World Bank and the International Monetary Fund (IMF), and setting up a system of fixed exchange rates.

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21
Q

What role did the gold discoveries in California and Australia play in the 19th-century economy?

A

The gold rushes in California (1848-1855) and Australia (1851-1860s) significantly increased global gold supply, stimulating global trade and investment.

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22
Q

How did the repeal of the Glass-Steagall Act affect the banking industry?

A

The repeal in 1999 removed the separation between commercial and investment banking, contributing to the 2008 financial crisis by allowing banks to engage in high-risk investment strategies.

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23
Q

What was the South Sea Bubble of 1720?

A

The South Sea Bubble was a speculative bubble in the UK where the South Sea Company’s stock price soared and then collapsed, leading to a financial crisis.

24
Q

What caused the South Sea Bubble?

A
  • Speculative Investment: Intense speculation in the shares of the South Sea Company, fueled by unrealistic expectations of profits from trade with South America.
  • Debt Conversion Scheme: The company took on government debt promising high returns, leading to inflated share prices based on future profit expectations.
  • Misleading Company Promises: The South Sea Company exaggerated its potential for success in trade, misleading investors.
  • Herd Behavior and Easy Credit: A frenzy of indiscriminate buying, driven by herd behavior and facilitated by easy credit, further inflated the bubble.
25
Q

What was the Industrial Revolution?

A
  • Era of Major Change: Spanning from the late 18th to early 19th century,
  • this period saw profound shifts in manufacturing, mining, and transportation,
  • primarily in Britain, which then spread to Europe and North America.
  • Technological Advancements: Characterized by breakthroughs such as the steam engine, mechanized textile equipment, and advanced metallurgy, fueling a shift from manual to machine production.
  • Transition from Agrarian to Industrial: Marked a move away from agriculture-based economies towards industrialization
  • Economic Growth and Urbanization: Triggered significant GDP growth, wealth accumulation, and urbanization, as industries expanded and populations increasingly moved to cities for work.
26
Q

What caused the Panic of 1837 in the United States?

A

The Panic of 1837 was triggered by a real estate bubble burst and a banking crisis, leading to a severe economic depression.

27
Q

How did the introduction of the Euro in 1999 affect European economies?

A

The introduction of the Euro facilitated increased trade and travel ease within the Eurozone but also led to economic challenges due to differing fiscal policies and economic conditions of member countries.

28
Q

What economic policies did Margaret Thatcher implement in the UK?

A

Thatcher implemented neoliberal policies, including privatization of state-owned industries, deregulation, and reduction in government spending on social services.

29
Q

What was the Spice Trade?

A
  • Ancient Beginnings (2000 BCE): Trade of exotic spices like pepper and cinnamon from Asia, especially India and the Spice Islands (Indonesia), to Europe.
  • Peak Demand (Middle Ages): Spices highly valued in Europe for flavoring, preservation, and medicine, peaking in demand during the Middle Ages.
  • Age of Exploration (15th Century Onwards): This era marks a period in European history when extensive overseas exploration emerged as a powerful factor in European culture and globalization. Driven by the desire to find new trade routes to Asia and to bypass the Middle Eastern and North African intermediaries, European explorers set out to sea. The primary motivation was to access the lucrative spice trade directly from the source in the East Indies (Southeast Asia, particularly the Spice Islands of Indonesia).
  • European Dominance (16th-17th Centuries): Control of the spice trade by European powers, especially Portugal and the Netherlands, leading to colonial expansion in Asia.
30
Q

How did the Opium Wars affect China’s economy?

A

The Opium Wars in the mid-19th century led to significant economic and territorial losses for China and marked the start of the country’s “Century of Humiliation.”

31
Q

What economic theory did John Maynard Keynes introduce?

A

Keynes introduced Keynesian economics, advocating for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of depression.

32
Q

What was the New Deal, and how did it impact the U.S. economy?

A

The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the U.S. during the 1930s to help recover from the Great Depression.

33
Q

Where did the stock market start?

A

The Amsterdam Stock Exchange, established in 1602 by the Dutch East India Company, is considered the world’s first official stock market.

34
Q

What is the average rate of return of the S&P 500 since its inception in 1926?

A

10%

(including capital appreciation and dividends)

35
Q

What’s the average inflation rate for the USA from 1914-2022?

A

3.2% per year

36
Q

What is the Dow Jones Industrial Average (DJIA), and when was it created?

A

The DJIA is a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States. It was created in 1896 by Charles Dow.

37
Q

What is the NASDAQ, and what is its significance?

A

The NASDAQ is a global electronic marketplace for buying and selling securities, launched in 1971. It was the world’s first electronic stock market and is known for its high concentration of technology stocks.

38
Q

How did the 1987 Black Monday stock market crash impact global financial regulations?

A

Black Monday led to the implementation of new trading rules, including circuit breakers to halt trading during extreme volatility, and prompted a reevaluation of portfolio insurance strategies.

39
Q

What is the Efficient Market Hypothesis, and how has it influenced investment strategies?

A

The Efficient Market Hypothesis suggests that at any given time, stock prices fully reflect all available information. It has influenced the rise of passive investment strategies and index funds.

40
Q

What was the impact of the euro’s introduction on European bond markets (in 1999)?

A
  • Convergence of Bond Yields: The introduction of the euro led to the convergence of bond yields among Eurozone countries, as investors perceived reduced currency risk within the union.
  • Lower Borrowing Costs: Countries with traditionally higher interest rates saw a decrease in borrowing costs, as bonds were now denominated in a common currency.
  • Increased Liquidity: The unified currency increased the overall liquidity of European bond markets, making it easier to buy and sell bonds across borders.
  • Masked Risk Differentials: The convergence initially masked the varying credit risk of different countries, which became apparent during the Eurozone debt crisis.
41
Q

What was the Eurozone debt crisis?

A
  • Starting in 2009 and lasting until the mid-to-late 2010s
  • Greece, Portugal, Italy, Ireland, Spain, and Cyprus, known collectively as the “PIIGS,” faced severe financial difficulties due to high government debt.
  • The crisis stemmed from various factors, including a failure to adhere to fiscal rules, a banking crisis, and financial contagion from the 2008 global recession.
  • The crisis resulted in a series of bailouts, stringent austerity measures, economic uncertainty, and political instability in the affected countries.
42
Q

How did the ‘Big Bang’ deregulation of 1986 change the London Stock Exchange?

A

The ‘Big Bang’ deregulated financial markets in London, leading to a shift from open-outcry to electronic trading, increased foreign ownership of UK brokerages, and solidified London’s status as a global financial center.

43
Q

What role did credit default swaps (CDS) play in the 2008 financial crisis?

A

CDS, used for hedging or speculating on credit risk, contributed significantly to the crisis by creating a web of interdependencies among financial institutions, exacerbating the risk of collapse.

44
Q

What was the role of the Plaza Accord in currency markets?

A

The 1985 Plaza Accord was an agreement among five major countries to intervene in currency markets and depreciate the U.S. dollar, leading to significant shifts in international trade dynamics.

45
Q

How did the Sarbanes-Oxley Act change corporate governance in the U.S.?

A

Enacted in 2002 in response to major corporate scandals, it increased accountability and transparency in corporate governance, imposing strict reforms to prevent corporate fraud.

46
Q

What is the history and significance of the LIBOR (London Interbank Offered Rate)?

A

Established in the 1980s, LIBOR is a benchmark interest rate at which major global banks lend to one another. It’s fundamental to the operation of both global financial markets and the global economy.

47
Q

What was the role of the Securities Act of 1933 in the U.S. stock market?

A

The Securities Act of 1933 was enacted to protect investors from fraudulent stock sales, requiring full disclosure of financial information for publicly traded securities.

48
Q

What role did the junk bond market play in the 1980s?

A

In the 1980s, the junk bond market helped finance large leveraged buyouts and corporate takeovers but also led to significant defaults and financial scandals.

Eg RJR nabisco by KKR for 25b

49
Q

What is the history of stock options and their role in employee compensation?

A

Stock options, used since the 1970s, give employees the right to buy company stock at a future date at a predetermined price, aligning employee interests with shareholders and potentially enhancing loyalty and performance.

50
Q

How did the Federal Reserve’s policies change post-2008 financial crisis?

A

Post-2008, the Federal Reserve implemented unconventional policies like quantitative easing, lowering interest rates to near-zero, and purchasing large quantities of financial assets to stabilize and stimulate the economy.

51
Q

What is “open market operations,” and how is it used by central banks?

A

Open market operations involve the buying and selling of government securities by a central bank to control the money supply and influence short-term interest rates.

52
Q

How does the People’s Bank of China differ in its operation from Western central banks?

A

Unlike Western central banks, the People’s Bank of China is more directly involved in the country’s economic planning and policies, reflecting China’s state-controlled economic model.

53
Q

How did the gold standard impact central banking policies?

A

Under the gold standard, central banks had to maintain gold reserves to back their currency, limiting their ability to expand the money supply and manage monetary policy flexibly.

54
Q

What firm fuelled the junk bonds industry of the 80s?

A

Drexel Burnham Lambert Inc.

55
Q

Who is the Chairman of the Fed?

A

Jerome Powell

56
Q

What did Treasury yields reach in 2023?

A

5%
(for 10 year Treasuries)

57
Q

What happend to bond yields after their highest point in 2023?

A

They came down a percentage point
Good for bond holders - as yields go down, prices go up!

58
Q

How did high-yield bonds perform in 2023?

A

Well! Index up 13%
Default rate on these bonds was just 3.8% (below the long term average of 4.5%)

59
Q

How is the IPO market in 2023?

A

$120b raised
This is low!
In 2021 it was $600b

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