Dissemination of the 2008 Financial Crisis Through the Role-Play Technique

Electronic copy available at: http://ssrn.com/abstract=1987824

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Dissemination of the 2008 Financial Crisis through the Role-play Technique

Miguel A. García-Rubio (corresponding author)

Assistant Professor in the Department of Applied Economics at the University of Granada.

Faculty of Economics and Business Administration. Campus de Cartuja. 18011 Granada

(Spain). Tlf: +34 958 240904. Email: [email protected]

Jorge Guardiola

Associate Professor in the Department of Applied Economics at the University of Granada.

Faculty of Economics and Business Administration. Campus de Cartuja. 18011 Granada

(Spain). Tlf: +34 958 244046. Email: [email protected]

Francisco González-Gómez

Associate Professor in the Department of Applied Economics at the University of Granada.

Faculty of Economics and Business Administration. Campus de Cartuja. 18011 Granada

(Spain). Tlf: +34 958 246258. Email: [email protected]

ACKNOWLEDGEMENTS

The authors would like to express their gratitude to all the students that have participated in

the activity described in this paper. Their opinions have helped to improve it considerably.

We would also like to acknowledge the comments made by the participants of the 7th

Workshop on Teaching Applied Economics, organised by the Asociación Libre de Economía

(ALdE) and held at the Official Association of Economists in Madrid. We appreciate their

comments, which contributed to the elaboration of this paper thank them for awarding it the

ALdE prize for teaching innovation. The usual disclaimer applies.

Electronic copy available at: http://ssrn.com/abstract=1987824

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Dissemination of the 2008 Financial Crisis through the Role-play Technique

Abstract.- This paper presents an application of the role-play technique for the dissemination

of the causes of the financial crisis that broke out in September 2008. This group technique is

a useful tool to help university students understand how this crisis started. Furthermore, it

enables us to attribute responsibility to each of the parties involved. Finally, all of the above

takes place in a learning environment that fosters student participation and motivation.

Keywords.- education, role-play, financial crisis.

JEL codes.- A22, E44, E58.

The financial crisis that broke out in 2008 has hit thousands of headlines in the daily press

over the last few years, has been frequently discussed on TV news and many books have been

edited in order to explain its origins and consequences (e.g. Shiller 2008; Soros 2008;

Acharya and Richarson 2009; Akerlof and Shiller 2009; Krugman 2009; Brown 2010; Judt

2010; Rajan 2010; Roubini and Mihm 2010; Stiglitz 2010). In addition, some new editions of

more or less classical works have been released (e.g. Galbraith 1979, 1993; Eichengreen

2002). People want to know more about a crisis that has deeply affected their lives.

This concern may be even greater among the university students. The demands for

information on behalf of students of subjects such as Politics, Sociology, Law, Pedagogy or

Chemistry1 motivated the authors of this paper to explain those students the causes of the

crisis. However, the authors soon realised that the structure of the master class was not

suitable for the proposed goal. There were two reasons for this: Firstly, this discursive

method results in a low level of student participation. Secondly, students’ prior knowledge of

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Economics was minimal, which posed an additional problem when explaining the genesis of

the financial crisis.

The answer to these problems was the incorporation of group dynamics. Role-play is a

powerful teaching tool. This technique is expected to create a flexible and student-friendly

working environment that enables them to experience the behaviour of the main economic

agents involved in the break-out of the crisis. In addition, this activity is expected to help

them attribute different degrees of responsibility.

The rest of the paper is structured as follows. The second Section presents the advantages

of role-play, as well as the requisites for using it correctly. The third Section describes the

different stages of this technique applied to the 2008 financial crisis: preparation, role-play

and discussion. Finally, the fourth section presents an overall valuation of the results and the

conclusions drawn from the experience.

WHAT CAN ROLE-PLAY CONTRIBUTE?

When teachers aim to provide students with a clear understanding of a type of behaviour or

situation, they frequently ask them to put themselves in the place of the person who

experienced it. However, if students play that role instead of simply creating a mental picture

of it, they will understand it more thoroughly and clearly. This is the essence of role-play.

It is commonly accepted that role-play as we understand it today was first used in 1974 to

play the famous Dungeons and Dragons (Mason, 2004). As time passed, the notion of role-

play at universities changed from incomprehension and mockery to discovering that it could

be more than a simple pastime and that, when adapted accordingly, it could be a powerful

teaching tool. This group technique has been adapted to history teaching (Tuovinen 2003),

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the management of tourism companies (Armstrong 2003), ethics (Prince 2006), electoral

processes (Scher and Johnson 2007), languages (Huang 2008), mathematics (Ahmad et al.

2009) and sustainable development (Buchs and Blanchard 2011), among others.

Generally, role-play has a series of advantages over other teaching techniques. It is

participative and motivating and it promotes an environment in students are interested in

studying the subject at hand. As role-play helps students feel identified with the problem

considered, it fosters thought about the attitudes implicit in each problem. Moreover, it

enables students to abandon the world of abstraction to enter that of reality, successfully

raising participant awareness of the problem and therefore stimulating student creativity.

In this case, we use role-play to explain the causes of the 2008 financial crisis and to

achieve the following goals:

i) To foster group participation in the classroom.

ii) To demonstrate a complex situation that, in the case of the causes of the financial crisis,

involves multiple parties and the usual difficulty students have when trying to understand the

process of bank money creation.

iii) To judge the decisions and institutional framework that contributed to causing the

problem under analysis.

Therefore, role-play allows students to experience the behaviours that brought about the

crisis in an environment of limited risk, as it is not a real situation. Therefore, when adopting

a role participants become conscious of what they are doing, how they go about doing it and

what consequences their acts have. The text by Yardley-Matwiejczuk (1997) provides

excellent insight into the theoretical grounds of role-play and facilitates its use in practice.

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DESCRIPTION OF THE DIFFERENT STAGES OF ROLE-PLAY

Role-play is part of group dynamics, so the same theoretical principles apply in terms of

design and organisation. In this Section we describe the various stages of this technique,

applied to the dissemination of the 2008 financial crisis. Overall, the activity is designed for 2

hours of class with between 25 and 30 students.

Preparation

The first step is to design the problem we aim to work with. As this problem must be well

defined and explained accurately, this stage requires the most time. In the case of the role-

play described here, we spent approximately 20 hours on the initial design of the activity.

The roles assigned are three commercial banks, an investment bank, three real estate

agencies, a risk rating agency, the Central Bank, the Government and workers or households.

We have aimed to adapt the situation with a certain degree of humour in order to make the

activity more appealing to students. Therefore, the commercial banks have funny names (Lost

Dough Bank, Hanky-Panky Bank and Hangover Bank), as do the investment bank (Rubbish

Investments & Co.), the real estate agencies (Perpetual Debt Apartments Ltd., Pay & Shut Up

Corporation and Little Houses Group) and the risk rating agency (Trustworthy & Maggo’s

Ltd.). Funny names have also been invented for the country (“Brickland”) and the official

currency (“Cocoanuts”)2. Moreover, due to the difficulty involved in playing the Central

Bank, the teacher assumes this role. Consequently, everyone in the classroom has a role to

play.

In addition, the following materials are necessary3:

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i) Signs desks to identify students as commercial banks, the investment bank, real estate

agencies, the risk rating agency and the government.

ii) For the proposed class size, 140 bank notes (cocoanuts) are printed and distributed as a

salary for the students that play the role of the workers. If there are more students than

expected, they can play the role of the unemployed, so they do not receive money, but can

participate in the rest of the activity.

iii) In order for the banks to be able to record client account movements, 30 bankbooks are

printed and handed out to the students that are playing the role of workers when they make a

deposit in the commercial bank of their choice.

iv) Likewise, 6 accounting ledgers are printed so that the commercial banks can record

their movements.

v) In order to physically register every mortgage, 36 mortgage contracts are printed and

distributed to the commercial banks. They officially take effect when signed by a worker who

has applied for a mortgage. Later on, the banks will create CDO’s (Collaterised Debt

Obligations) by simply attaching two signed contracts with a paper clip.

vi) For the investment bank, 6 bankbooks and 2 bank statements are also printed.

vii) Finally, 36 houses are printed and distributed among the real state agencies.

Role-play

The activity starts with a brief 15-minute introduction from the teacher and then the different

roles are assigned. Generally, simulation through role-play makes the objective of study real

and visible for all those participating. Every student actively participates in the process,

achieving a great degree of rapport.

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Given the complexity of the situation described, the entire role-play exercise is guided by a

presentation4 that helps students to understand the rules that the different agents must abide

by. The role-play lasts 75 minutes.

After the roles and materials described in the last Section are assigned, the households are

asked to deposit their money in a commercial bank of their choice. In exchange, the

commercial bank prepares a bankbook, gives it to the customer and makes several entries in

its accounting ledger.

Next, the Central Bank imposes a basic rule: commercial banks must deposit 20% of the

money their customers have deposited in their accounts in the Central Bank. This introduces

the concept of the cash ratio, which will have an important role in the discussion of the

activity. The commercial banks also record these movements in their accounting ledger.

After this, the process of buying and selling houses begins. In order to buy a house,

students sign mortgages with the commercial banks and in exchange they receive the money

they need to pay the real estate agencies for a house. Once several sales have been completed,

the banks soon run out of liquidity and activity ceases.

Later, the real estate agencies deposit their money in an investment bank, where they

expect to receive a high return on their monetary assets. Meanwhile, the commercial banks

start securitising mortgages (CDOs) by simply attaching two previously signed mortgages

with a paper clip, as mentioned earlier. The risk rating agency confirms the solvency of these

new financial assets and the commercial banks sell these CDOs to the investment bank,

therefore regaining liquidity to grant mortgages. As a result, there is another round of house

buying on behalf of households.

The start of the crisis renders all CDOs worthless. Consequently, we proceed to calculate

the debt of the investment bank as the difference between its liabilities and assets, as all

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transactions have been recorded in the accounting ledger. In addition, houses lose value and

the commercial banks halve the ledger entry for “mortgages” and proceed to calculate their

debt. The initial value of a house is eight “cocoanuts” and it falls to four cocoanuts.

Household debt is also computed by simply summing the number of mortgages granted and

multiplying this number by the value of a house.

After adding up the debt of all the agents, this quantity is compared with the amount of

money that was in circulation at the beginning of the simulation. This gives students a picture

of the relative importance of the global debt.

Finally, the households are requested to go to their commercial banks in order to withdraw

the money they initially deposited. They then discover that this money cannot be withdrawn.

The lack of liquidity of the banks is revealed and, in turn, the difficulties to fund productive

activity in this simplified economy. As a consequence, many companies close,

unemployment rises and government revenue decreases. The student perceives the

relationship between the financial crisis and the real crisis that takes place afterwards.

Comments and Discussion

The role-play stage is the most attractive part of the activity and aims to motivate the students

and give them specific figures and significant and visible situations. However, the comments

and discussion stage is the most important in the entire activity and lasts for 30 minutes.

The teacher leads the comments and discussion stage of the role-play. Firstly, students are

asked for their impressions and explain their performance. Then, students are normally

perplexed, as they are not conscious, in their roles, of contributing to the birth of a financial

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crisis. Afterwards, the group as a whole express their impressions and question the rest of

participants in order to understand the role they have played.

At this point, the students begin to have a simplified representation of the situation that

triggered the crisis. It is at this time that they are asked to attribute different degrees of

responsibility to the different parties involved, which they normally do without too much

difficulty.

Furthermore, the teacher suggests that students search for actions that could have avoided

this outcome. As a result, students become aware of the fact that all parties play a part in the

origin of the financial crisis.

Students also frequently demand more information on the genesis and consequences of the

crisis during this stage of the activity. The teacher answers their questions as they arise and

the new information is incorporated into the debate, thereby enriching the activity and

students’ comprehension.

RESULTS AND CONCLUSIONS

The results of the activity have surpassed our expectations. We recognize that, while

designing the activity was fun, we were doubtful and unsure about how successful it would

be. The lack of use of these kinds of educational techniques at universities, except in the field

of educational sciences, strongly dissuaded teachers. However, this situation became a

powerful ally and the activity was welcomed by the students. The topicality and interest of

the subject chosen were also undoubtedly aspects that appealed to the students.

The results confirm that role-play transmits the complex relationships between the parties

involved in the financial crisis in an amusing way. Hence, students get a picture of the origin

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of the financial crisis that allows them to assign each party its corresponding degree of

responsibility. This avoids simplistic interpretations and encourages students to form their

own opinion.

Although this is a fun activity, it is also rigorous and helps to familiarise students who lack

prior knowledge of economics with a great number of economic concepts. Table 1 presents

the economic concepts used in the activity.

[Insert Table 1 about here]

Finally, after the role-play itself and during the comments and discussion stage, students

are frequently perplexed by the role played by the general public. In other words, they do not

understand how it is possible that all parties fuelled the belief that housing prices would

continue to increase uninterruptedly5. This appreciation resembles the expression “mass

insanity” used by Galbraith (1993):

“That the free-enterprise economy is given to recurrent episodes of speculation will be

agreed. These –great events and small, involving bank notes, securities, real estate, art,

and other assets or objects– are, over the years and centuries, part of history. What have

not been sufficiently analyzed are the features common to these episodes, the things that

signal their certain return and have thus the considerable practical value of aiding

understanding and prediction. Regulation and more orthodox economic knowledge are not

what protect the individual and the financial institution when euphoria returns, leading on

as it does to wonder at the increase in values and wealth, to the rush to participate that

drives up prices, and to the eventual crash and its sullen and painful aftermath. There is

protection only in a clear perception of the characteristics common to these flights into

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what must conservatively be described as mass insanity. Only then is the investor warned

and saved”.

We hope this activity goes some way towards, using Gralbraith’s words, “warning and

saving” the students who have participated from future speculative bubbles.

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NOTES

1 The authors have taught Introductory Economics on all these degree courses.

2 In memory of The Cocoanuts (1929), the first feature film by the Marx brothers.

3 All the materials are available to the reader upon request.

4 The presentation is also available readers upon request.

5 In Spain, the housing bubble was an important factor to understand the boom in credit

during the years prior to the crisis (Naredo et al. 2008).

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TABLE 1. Economic concepts used in the activity

Assets Financial assets Mortgage contract

Balance sheet Financial crisis National currency

Bank deposits Financial innovation Note of money owing

Bank deposits at Central Bank Financial instruments Profitability

Bank panic Financial system Property bubble

Bankruptcy Financial sector debt Rating agency

Bonds GDP Real crisis

Cash ratio Government bonds Regulation

Cash deposit requirement Goods Savings

CDOs Risk Savings bank

CDO2 Household debt Securitisation

Central bank Interest rate Security

Commercial banking Investment banking Shares

Construction sector Liabilities Treasury bills

Economic growth Liquidity Unemployment

Employment Monetary policy Wages