Newswise — Dean Johnson gives his students a primer on America's two greatest economic crises: the 1929 stock market crash and the 2008 implosion of the housing market. "The particulars are different," says the associate professor of finance. "But the basics are familiar to us."
Both the housing and stock market bubbles were driven by debt""buying on margin""and fueled by the false expectation that values would always rise. "One little blip and everything started to unwind," he says.
Human psychology is important. If people are cautious and not spending money, the government and financial industry must take action that will push capital liquidity. "The economy is based on trust," he says.
And that trust seems to be returning, Johnson says. The Volatility Index, or VIX, which measures investors' expectations of how volatile the stock markets will be, reached all-time highs a year ago. "People think of it as the fear gauge," he said. "It's encouraging that the VIX, though still high by historical standards, is down about 60 percent from what it was at its peak in November."
"It's still a risky market," he stresses. "This is the first time in history that you'd have been better off if you'd put your money under the mattress 10 years ago. But hopefully, this indicates that the financial markets are returning to normal."
He's not surprised that federal efforts to make it all better haven't quite restored the overall economy to blooming health, however.
"There's no easy fix," he says. "We have to take our medicine. It took 20 years to create the over-leverage, and it will take time to undo that. "
As adviser to the Applied Portfolio Management Program (APMP), Johnson as watched as his students have grappled with economic uncertainty. The teams manage a portfolio on behalf of the Michigan Tech Fund. In better times, they made lots of money, won national competitions, and learned about the finer points of finance.
"This year, they are also learning how to present bad news to their advisory board," Johnson smiles. "It's just like having to deliver a presentation with bad news as a CEO would do to a board of directors."
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