Hazard Warning Trivia Quiz

Answer: Kipper und Wipper

Anyone with sufficient common sense could have issued a hazard warning: if the Berlin mint spends fake Hanoverian coins to pay Polish mercenaries, chances are that these mercenaries use the fake coins to buy goods in Berlin...

Indeed the "Kipper und Wipper" plan backfired exactly as described above. The plan ran from about 1620 until 1623, when it was discontinued because of exactly this problem. However, the general economic situation in Germany, Austria, Poland, Hungary and other countries had suffered vastly from this scheme (as well as from the war).

Vespasian invented the tax on public sanitary installations, and justified it with the well-known quote "Pecunia non olet" ("Money doesn't stink").
Mercantilism was the economic doctrine aimed at accumulating monetary reserves, using (amongst other measures) toll barriers, the establishment of overseas colonies, and autarkist ambitions. The French Minister of Finances Jean-Baptiste Colbert (1619-1683) is one of the best known mercantilists.

The curse of Moctezuma (in its economic sense) is that the mass import of silver and gold into Spain in the sixteenth century provoked a hyperinflation which made an end to the political influence of Spain on the European continent. The power shifted to countries less struck by hyperinflation.

Answer: Tulips

The tulips were plants widely cultivated in Turkey. When the Flemish botanist Carolus Clusius, professor at Leiden, imported the first tulips to Holland, he gained wide esteem.

Soon every rich and famous Dutch wanted to plant some tulips in his garden. Multi-coloured tulips were especially in demand (although later research showed that their bright colour nuances were caused by a disease that hampered reproduction).

The Amsterdam stock exchange started dealing in tulip options. This financial instrument permits to pay a small amount of money (for instance 3% of the fixed price) for the right to acquire a certain amount of goods at a price fixed in advance, whereas the time of delivery is some time later - in the case of the tulip options, usually the moment of the harvest of the tulip bulbs.
Prices took off immediately. One notorious example is the contract to pay 5,000 florins for a single tulip bulb, while a skilled worker gained on average 150 florins a year...

Although people with common sense nowadays would see the hazard warning when a single tulip costs more than 30 years' wages, prices continued to rise - until February 3rd, 1637. Two months later the average price was less than 1% of that of February 3rd.

I have found no examples of a similar inflation or depreciation in the case of light bulbs. Paintings of irises by Van Gogh have been sold at astronomical prices, though. And in the 1950s, rumour had it that some people tried to inflate the price of onion futures.

Answer: John Law

Maybe someone had to utter the hazard warning that appointing a notorious gambler at the head of a central bank, was not the brightest idea ever. But John Law, the gambler we're looking for, was most probably not the only one to blame for the Mississippi Bubble.

John Law was born near Edinburgh in 1671, into a family of bankers and goldsmiths. He was an apprentice in his family's bank, when he took up gambling and squandered a large portion of the family capital at the end of the 1680s. In 1694, he fled England after a conviction for murder (upon a man he challenged for a duel).

Law befriended the Duke of Orleans, who introduced him to the French royal court. Soon Law started his French businesses: the Banque Generale (in name a private banking corporation, but in fact the French central bank) and the investment in the Compagnie des Indes - in the English world known as the Mississippi Company.

John Law sold shares in the Mississippi Company for a small payment up front (5%), while the rest had to be fulfilled in several periodic instalments. This was one of the reasons why so many people bought the shares: they did not have to pay the full price up front, and they hoped to use the profits of their investment to fulfil the further periodic instalments. Alas, John Law's marketing campaign had greatly exaggerated the profits to be expected...
In 1720, John Law was banished from France. He died in poverty in Venice in 1729.

Dunlop, McAdam and Baird were Scottish inventors - of the rubber tyre, the modern paved road and the television, respectively. 

Answer: France

In 1789, the French Revolutionary government confiscated all church properties and abolished all religious congregations. The church properties would be converted into money in order to pay the military expenses - France was at war with several of its neighbours.

It would of course take some time to sell all church properties at the desired price. So the former Bishop de Talleyrand came up with the idea to print government bonds (called assignats), which would be sold to the public. Anyone who wanted to buy some religious property (for instance liturgical robes), could pay the price by means of these assignats.

At first, the assignats offered a yearly interest of 5%. Later on, the government diminished and finally abolished this interest rate. Shrewd investors could have seen this move as a hazard warning.

Because of the recurrent issue of more and more assignats, the real assignats in 1796 represented about 15 to 23 times the value of the confiscated goods. On top of these real assignats, there were also fake assignats printed and divulged by the British as a means of economical warfare. The French market for assignats crashed in 1796, and the French Directoire (government) abolished the assignats - only to launch a similar instrument, which crashed even quicker.
French military governors have tried out a system of assignats in Italy in 1798-1799. Alas, the rules of economics are the same in France and Italy: the system rapidly crumbled.

Russia called its banknotes assignatsia in the period 1769-1849. But other than the name, the system was not comparable to the French experience.
Argentina (2014), Greece (2010) and Nigeria (2004) are some countries having suffered sovereign defaults.

Answer: Herbert Hoover

Most of you know that Black Tuesday and the other events described in this question happened in 1929. It was the first year of the newly elected Republican President Herbert Hoover, who succeeded his party member Calvin Coolidge.

Hoover (1874-1964) was active as a mining engineer. However, in 1900 in Tientsin (China), he proved able to lead humanitarian rescue programmes - which he repeated in 1914, when the Germans occupied Belgium. Hoover worked as Secretary of Commerce under Presidents Warren Harding (President from 1921 until 1923) and Calvin Coolidge (President from 1923 until 1929).

The economic prospects when Hoover took office in 1929 seemed quite favourable. But those who took a closer view at the economics, might have seen a glimpse of a hazard warning.

Indeed: stock markets were booming, but for a major part the stock growth relied upon the "greater fool" theory: the theory that one could buy anything, with good hope to sell it with a profit to a greater fool. Many people borrowed money to buy stock shares, as the prices seemed to go up constantly and infinitely.
But as the idiom says: "what goes up, must come down". In October the bubble burst, and the Dow Jones index would continue on a losing streak for at least three years.

Woodrow Wilson (1856-1924) was President of the USA from 1913 until 1921. Ronald Reagan (1911-2004) was the US President from 1981 until 1989. Calvin Coolidge (1872-1933) was the US President from 1923 until 1929.

Answer: Silver

Nelson B. Hunt and William H. Hunt are the sons of a Texan oil tycoon. At the end of the seventies, they decided to go out and buy as much silver as they could lay hands on. Soon they controlled about one third of the silver supply, and they provoked a price inflation from 6 USD per troy ounce to almost 49 USD per troy ounce of silver in less than a year. This might have served as a serious hazard warning. But then the exchange market reacted by limiting the amount of silver which could be bought with borrowed money. The Hunt brothers lost a fortune because of this scheme going awry.

Aristotle once told of a monopoly for olive oil presses held by the Greek philosopher Thales of Miletus, whose speculations won him a fortune. There have also been price manipulations of crude oil, sometimes successful. As for printing ink, I can't imagine speculative movements because of the vast quantities of ink available, and the number of ink producers.

Answer: Alan Greenspan

Alan Greenspan was born in 1926 in New York City, son of a stockbroker from Jewish descent. In 1945 he went to New York University and majored in economics five years later. His career took off as economic consultant, while also spending some time as corporate director for several American multinationals.
Greenspan was nominated Chairman of the Federal Reserve Board in August 1987. Barely two months later, he was confronted with the largest stock market crash ever witnessed (both in absolute numbers as in percentage). Greenspan made available large amounts of money to support the investment banks, and as none of the important banks went bankrupt, the stock market soon recovered. In 1929 several of the major banks went bankrupt, which contributed to the Great Depression.

Paul Volcker (born 1927) was Greenspan's predecessor. Volcker presided the Fed between 1979 and 1987.

Greenspan would be succeeded in 2006 by Ben Bernanke, who stayed in office up till February 2014. Bernanke was then succeeded by Janet Yellen - the first woman to occupy this post.

Answer: False

Why would a Wednesday be different from any other week day? Stock market crashes have occurred on Monday (Black Monday, 19 October 1987), Tuesday (Black Tuesday, 29 October 1929), Wednesday (Black Wednesday, 16 September 1992), Thursday (Black Thursday, 24 October 1929) and Friday (Friday the 13th Mini Crash, 13 October 1989), to state only the best known occasions.

In September 1992, the crash of the stock markets was provoked by extreme pressure on the British pound, that had to leave the European Exchange Rate Mechanism (ERM), a system devised to limit the exchange fluctuations between several European currencies. As Germany raised the interest rate to avoid rising inflation, the UK and Italy had to follow this move to stay within the ERM - although their large deficits made it unwise to do so, according to classical economists.

George Soros, one of the most famous investors, saw the hazard warning in the first half of 1992. His investment fund bought up tons of pound sterling, only in order to sell them off massively on September 15th. This shrewd move gained George Soros several billions of dollars.

By the way, the summing up of the different stock market crashes in the first lines of this info section, may give you the impression that most crashes occur in October. Don't take this as an omen: markets can crash in each and every month, as long as they are open for investors. Always remember Mark Twain's quote: "OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February."

Answer: Enron

The aforesaid quote was used frequently during the Dot-com Bubble (1995-2000), to argue why the shares of internet companies should not be valued on the same base as any other share.

According to the adepts of "This time it will be different", it would be very healthy for its financial status that an internet company would spend billions in the first few years to get a strong brand recognition, and then win back its losses over the next few years. Companies such as Google and Amazon.com had proved their ability to wipe out their early losses, and some biotechnology companies also succeeded in doing so (for instance Amgen and Gilead Sciences).
But if a company accumulates severe losses over some years, chances are that not sufficient investors will come up, resulting eventually in the company going bankrupt. Global Crossing (various telecommunications via the internet), North Point (data transmission over the internet) and WorldCom (telephony over internet) were some victims of the Dot-Com Bubble.

Enron was another story. Enron was not an internet company, but an energy provider. In December 2001, Enron went bankrupt because of an accounting scandal. Many so-called assets of Enron existed only on paper, and subsidiaries which in reality cost Enron several billions were presented as profit-making investments. These dubious accounting practices have contributed to misleading the common investors, so Enron's share boomed - until the moment a number of accountancy specialists uncovered the real situation.

Answer: Mortgage loan to insolvent people

Although all these products represent more than average risk for the financial institution, the most dangerous of these mortgages is the NINJA loan: a loan to insolvent people, i.e. people having No Income, No Job nor Assets. (The capital letters spell out the word NINJA).

Prudent mortgage lenders will examine the capability of the borrower to repay the loan according to the convened schedule. Several European authorities have made this inquiry a legal obligation for the banks and other financial institutions.

A NINJA loan is solely based upon the hope that the house which has been financed with the loan, will sufficiently appreciate in value to cover the debt when the house is sold. It is the typical example of the "greater fool theory": someone who is foolish enough to buy a house that he can't afford, hopes to resell it with a profit to an even greater fool.
Mortgage loans typically are used to finance real estate: buying a house, renovating it, and so on. The immovable property for which the money is used, typically serves as a guarantee for the bank. A borrower who takes out a mortgage to buy equity, is usually someone who can't afford any loss on the equity bought with the loan - so this type of mortgage is more risky than the classical housing mortgage.

A second mortgage is secured by a second (or lower) rank on an immovable property. If it comes to foreclosure, the first mortgage will be repaid first, and only the remnant serves to repay the second mortgage, and so on.

Mortgages at extreme long duration (over 30 years) represent several elevated risks. As the borrower needs to repay his mortgage during a longer term, the chance that he dies during the mortgage duration increases. Furthermore a person who insists on borrowing at very long durations, will usually have an income just too low to repay on a normal duration.