1. Advanced Macro: Macro & Crises Conclusion Jeffrey Nilsen

2. A. Einstein  “Education is not the learning of facts, but the training of the mind to think”

3. Macro & Crises: how do economists understand crises ?  II. Review of financial markets concepts – all slides applicable (term structure, moral hazard, costly state verification)  III. Classifying Crises - introductory on credit booms, bubbles, debt crises, banking crises, currency crises  IV. Financial Cycles and Credit Booms – stylized facts of financial cycle, financial cycle => monetary economy (natural interest rates differ from market rates). Savings glut example of natural rates. Gross inflows.Typical credit boom, Good & Bad booms, Financial Accelerator (Gertler, Bernanke).  V. (Sovereign) Debt Crises – Reinhart & Rogoff, tools for alleviating high debt, debt overhang  VI. Banking Crises - Review liquidity management, bank capital, Diamond & Dybvig model  MID-TERM

4. Macro & Crises: how do economists understand crises ?  MID-TERM  VII. Currency Crises and Sudden Stops – BOP review, Central bank actions to peg, PPP, FX market, peg vs. fundamentals, sudden stops, gross capital flows – ignore sudden stop & RER slide – Currency crises gen 1 (Krugman model), 2 (game theory), 3 financial – ignore serially correlated PH slide -  VIII. Housing – housing bubbles, q theory, short-run housing demand – ignore housing supply over time  IX. Asset Price Bubbles – ignore simulation slide – rational vs. behavioral, example rational, behavioral bubbles (ignore math on rational bubble requirement)  X. Dissecting the 2008 Crisis & Repos – special purpose vehicles, margins, leverage, a repo explanation of the crisis (adverse selection due to subprimes in MBS)  XI. Indicators of Crisis (Shin): the problem with wholesale finance (it’s procyclical)

5.  Asset (paying div = $0) & current P = $10  You expect next year’s P = $15 (50% return)  Improve return if buy on 50% margin (borrow $5 at 20% interest rate):  Your initial outlay $5  Repay $5 with $1 interest in year  If P rises to $15, your return = (15 – 6 – 5)/5 = 80% (sale P – repay bank loan w/interest – initial $5 outlay)  BUT if P falls to $5, your return = (5 – 6 – 5)/5 = -120%  Without margin, your return = (5 – 10)/10 = -50% Why is buying shares on margin so attractive but so dangerous ?? (example)