Using the prisoner's dilemma show why a conservative bank would have to take great risks in the banking industry by offering liar loans, subprime loans, Adjustable ARM loans, etc. Explain how banks increasing leverage in 2002-2006 period was consistent with Minsky's theories. Show how a leveraged bank can make higher profits during a boom than an unleveraged firm. Then, show how a leveraged bank can lose much more of its capital during a recession than an unleveraged bank. What was Greenspan's argument of why housing was not a bubble? What is wrong with his argument according to Cassidy? Explain how Greenspan was guilty of the law of small numbers. In terms of policy, what did Greenspan support during the period 1996-2006 that contributed to the financial crisis? Explain interest only loans, stated-income loans, adjustable ARM loans Explain how herd behavior contributed to the housing bubble Explain how the subprime loan market is a market for lemons. How did politicians feel about the subprime mortgage market before the financial crisis? Explain. What is the problem with VAR (value at risk) models? Why did so many investment banks have to start buying CDO's and other mortgaged backed securities themselves (rather than selling them to other investors). Why did they buy these assets