By GTA Instructor Krystal Fortner
Teaching financial literacy and economics at Game Theory Academy sometimes makes me feel like I’m getting older. How, you may ask? Well, when I say to my students, “Remember the credit crisis that happened a few years ago?” they often look at me with blank stares. Then I realize they were probably too young to remember it. But their parents do.
One of the premises of the GTA curriculum is learning to think through decisions in terms of “best self-interest.” The famous Adam Smith believed that if everyone operated in their best self-interest, then the economy would run fairly and efficiently. Let’s relate that assumption to the Global Credit Crisis that happened about five years ago.
It was 2006. The economy was roaring. Real estate was the hottest investment. Interest rates were low, and banks needed to make money. So they operated in their best self-interests, to make a profit, and designed creative lending solutions to reach more consumers. Sub-prime mortgages, interest-only mortgages, no-doc mortgages, adjustable-rate mortgages, negative amortizing mortgages. Consumers, also operating in their best self-interests, took advantage of those creative solutions, and were able to buy homes that historically would have never been possible.
Enter 2007. Interest rates started rising. All of a sudden, those consumers couldn’t pay the increased mortgage payment. Foreclosures were rampant. People lost their homes. Then, banks started losing money. And when banks start losing money, the financial world comes to a halt, which is exactly what happened in 2008 and 2009.
How does this affect my GTA students? One of the most important tenets I want my students to learn is how to make an informed decision. By teaching them about the Global Credit Crisis, they now have the knowledge and power to come through the next credit crisis unharmed and with their financial lives intact. They will think twice about entering into an arrangement that is too good to be true, and they will always keep in mind, “What is in my best self-interests?”
Because most of the time, anything that seems too good to be true usually is, my students learned that they need to know exactly what they are getting themselves into BEFORE signing on the dotted line. They are properly armed with smart questions to ask when they apply for a credit card, bank account, or student loan. As one student Peter put it, “I know I need to ask questions. Lots of them. Because I now know that lots of places depend on me to make an UN-informed decision…”
Here is a short video that explains the Global Credit Crisis in very simple terms: