Misunderstanding Financial Crises Why We Didn't See One Coming

Author: Gary B. Gorton
Publisher: Oxford University Press USA
ISBN: 9780199922901
Published In: October 2012
Format: Hardback , 296 pages
Jurisdiction: International ? Disclaimer:
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- More easily accessible version of Gorton's authoritative take on financial crises.
Prior to the financial crisis of 2007-2008, economists thought that no such crisis could or would ever happen again in the United States, that financial events of such magnitude were a thing of the distant past. In fact, observers of that distant past--the period from the half century prior to the Civil War up to the passage of deposit insurance during the Great Depression, which was marked by repeated financial crises--note that while legislation immediately after crises reacted to their effects, economists and policymakers continually failed to grasp the true lessons to be learned.

Gary Gorton, considered by many to be the authority on the financial crisis of our time, holds that economists fundamentally misunderstand financial crises--what they are, why they occur, and why there were none in the U.S. between 1934 and 2007. In Misunderstanding Financial Crises, he illustrates that financial crises are inherent to the production of bank debt, which is used to conduct transactions, and that unless the government designs intelligent regulation, crises will continue. Economists, he writes, looked from a certain point of view and missed everything that was important: the evolution of capital markets and the banking system, the existence of new financial instruments, and the size of certain money markets like the sale and repurchase market. Delving into how such a massive intellectual failure could have happened, Gorton offers a back-to-basics elucidation of financial crises, and shows how they are not rare, idiosyncratic, unfortunate events caused by a coincidence of unconnected factors. By looking back to the <"Quiet Period>" from 1934 to 2007 when there were no systemic crises, and to the <"Panic of 2007-2008,>" he brings together such issues as bank debt and liquidity, credit booms and manias, and moral hazard and too-big-too-fail, to illustrate the costs of bank failure and the true causes of financial crises. He argues that the successful regulation that prevented crises did not adequately keep pace with innovation in the financial sector, due in large part to economists' misunderstandings. He then looks forward to offer both a better way for economists to conceive of markets, as well as a description of the regulation necessary to address the historical threat of financial crises.

Readership: Students and scholars of economics, finance, and business. General readers interested in the financial crisis.
Preface
I. Introduction
II. Creating the Quiet Period
III. Financial Crises
IV. Liquidity and Secrets
V. Credit Booms and Manias
VI. The Timing of Crises
VII. Economic Theory without History
VIII. Debt During Crises
IX. The Quiet Period and Its End
X. Moral Hazard and Too-Big-To-Fail
XI. Bank Capital
XII. Fat Cats, Crisis Costs, and the Paradox of Financial Crises
XIII. The Panic of 2007-2008
XIV. The Theory and Practice of Seeing
Bibliographic Notes
Notes
References
Index
Gary B. Gorton, The Frederick Frank Class of 1954 Professor of Finance, Yale School of Management

The Frederick Frank Class of 1954 Professor of Finance at the Yale School of Management. Author of Slapped by the Invisible Handbook: The Panic of 2007 (OUP USA, 2010, 01, $34.95 HC, 4,488 copies LTD, 427 copies ebook LTD).
"The book offers essential insights into the mysteries of the recent financial crisis. Gorton has the rare depth of understanding to explain the elements and similarities of a wide array of historical crises. Fascinating reading."--Robert J. Shiller, Arthur M. Okun Professor of Economics, Yale University, author of Irrational Exuberance andFinance and the Good Society

"Professor Gorton has produced an excellent, readable and incisive account of the recent financial crisis in historical perspective. We, as economists, have an obligation to understand our own profession's failings in the policy framework leading up to the financial crisis. Gorton shows us that blind faith in mathematical models of idealized economies can lead to blind spots in regulators' view of economic reality. This phenomenon had disastrous consequences during the 2008-2009 financial crisis, as intricately documented in this book. The book presents important lessons for how financial regulatory reform should be designed and implemented in the future. In addition, it provides a cautionary tale for economists to rethink their approach to policy advice more generally."--Justin Yifu Lin, Chief Economist and Sr. Vice President, World Bank

"Financial Crises have been a feature global finance for centuries, but economists and other analysts still struggle with the subject. If anything, since the events of 2007-2009 and the more recent crisis in Europe our fears have only grown larger. In this timely new book Gary Gorton reviews history, theory and evidence concerning financial crises, their causes and possible research and policy responses. It is at the same time very thorough and very interesting, and will no doubt appeal to academics and practitioners." --Arminio Fraga Neto, former President, Central Bank of Brazil, Founder, Gavea Investimentos