Misunderstanding Financial Crises: Why We Don't See Them Coming

by Gary Gorton

Before 2007, economists thought that financial crises would never happen again in the United States, that such upheavals were a thing of the past. Gary B. Gorton, a prominent expert on financial crises, argues that economists fundamentally misunderstand what they are, why they occur, and why there were none in the U.S. from 1934 to 2007.

Misunderstanding Financial Crises offers a back-to-basics overview of financial crises, and shows that they are not rare, idiosyncratic events caused by a perfect storm of unconnected factors. Instead, Gorton shows how financial crises are, indeed, inherent to our financial system. Economists, Gorton writes, looked from a certain point of view and missed everything that was 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. Comparing the so-called "Quiet Period" of 1934 to 2007, when there were no systemic crises, to the "Panic of 2007-2008," Gorton ties together key issues like bank debt and liquidity, credit booms and manias, moral hazard, and too-big-too-fail--all to illustrate the true causes of financial collapse. He argues that the successful regulation that prevented crises since 1934 did not adequately keep pace with innovation in the financial
sector, due in part to the misunderstandings of economists, who assured regulators that all was well. Gorton also looks forward to offer both a better way for economists to think about markets and a description of the regulation necessary to address the future threat of financial disaster.

Genres: Economics, Finance, Nonfiction

296 pages, Hardcover

First published November 1, 2012

Reviews

[Frank Stein · Rating 3 out of 5]

This is a interesting but ultimately frustrating book, one that betrays the author's unimpeachable confidence in his own theories but also his sloppy research and writing style.

The book emerged out of earlier work Gorton had done including his famous speech at the Federal Reserve, "Slapped by the Invisible Hand," in 2009. The argument that he has articulated ever since seems to me, on the whole, sound. It is that most of the obsession with bank regulation since the crisis is misplaced. The major reforms, including Dodd-Frank, all aim to force banks to make safer loans and hold higher-rated bonds or investments. Gorton says the real problem with bank crises isn't on the asset side of banks' balance sheet, but on the liability side, and specifically comes from banks' natural reliance on short-term debt and deposits that can all be withdrawn at a moment's notice. This is because banks, in their checking, money-market accounts and through other means, provide something that no other company does, and that is a form of money itself. He shows money works like money precisely because it is assumed to be completely liquid and tradable and devoid of secrets that could make it sell at less than par. Your checking account works just like money because everyone assumes you can write a check or make a debit transaction on it whenever you feel like it and it will be accepted at 100% of its value. This provision of "money" to the consumer as a special good means banks don't have to pay you much, or at all, to get you to lend to (or deposit in) them, and this is why they get so much of their funding from these short-term or demand liabilities. Yet obviously with fractional reserve banking all of your money is never actually there, and this means at periodic yet somewhat unpredictable moments, banks face runs on their short-term liabilities, and the "money" they create in essence evaporates. With deposit insurance the classic types of runs have been corralled, but through money market funds, asset-backed commercial paper, and wholesale "repo" agreements, banks have created other short-term liabilities that act like money that can also be subject to runs, and were in 2007 and 2008.

This is why a focus on capital regulation is also misplaced, Gorton says. Banks like Citigroup that were later shown to be insolvent had much higher capital ratios than the Basel III accord now demands, but they faced runs on their liabilities in the repo market where they got much of their funds. Any bank, in fact, can quickly become "insolvent" in a panic situation where runs cause asset prices to dive and capital to be eaten up. Gorton thus says that the private sector cannot and should not create money, because it cannot insure complete and non-secret confidence in any liabilities and money it creates. The only true reform to prevent panics is to require banks to have all their money-like liabilities backed 100% by liquid government bonds. (If this sounds socialistic, it actually been a long pedigree in monetarist thought. See my review of "The Chicago Plan and New Deal Banking Reform," for Jacob Viner's and others similar theories in the 1930s, and John Cochrane of U of C's recent Wall Street Journal op-ed).

Yet Gorton conveniently ignores all evidence that points in another direction. Far from being completely random, historical research has confirmed that runs rarely take place on solvent institutions, and that poor asset management is often the cause of bank runs and bank crashes. Gorton also makes it seem easy for regulators to understand when a short-term liability becomes so liquid as to function like money, and thus to demand complete regulation of it. He shows, for instance, how money-market funds arose in the 1970s precisely to work around the strictures of deposit insurance and regulation, and there's a virtual guarantee that requiring 100% backing of demand liabilities today would mean more regulatory arbitrage and more financial innovations to evade the federal requirements (and recent events in Greece, Spain, and even the U.S. show that government bonds themselves aren't always totally safe and liquid). If only bank regulation was as simple as Gorton would like to make it.

I enjoyed the book most when Gorton stopped theorizing and started investigated the historical basis behind previous panics, which sometimes seemed to contradict his own theories. For instance, he shows how previous attempts to regulate money failed, like with money market funds, or when the National Banking Acts of 1863-1865 banned state bank currency issue, and required national banks to only issue currency backed 100% by government bonds (not until 1913 would the government and the federal reserve issue currency directly). So banks in the 1860s and 1870s turned for the first time from issuing currency to their customers to focusing on deposit and checking accounts, which functioned like currency, and thus were liable to similar runs. The Panic of 1873 was called by "The Financier" magazine "The Depositor's Panic," and "The Nation" lamented that the new national currency, whatever its other virtues, "does not possess the power of preventing panics." A cautionary tale here.

Even Gorton's historical stories, however, seem to be very hastily assembled, and with poor referencing. His discussion of what he calls the "Livingston Doctrine," from a 1857 New York Supreme Court case that, despite a specific constitutional amendment to contrary, refused to penalize banks that suspended payments, shows how governments have always stopped collections in a crisis, and always refused to "liquidate the financial system," but it would have benefitted immensely from some grounding in legal history. Like many of the economists he critiques, he also seems to have a poor understanding of the context of many of the old panics. Thus this book should give one a different perspective or recent crises, one with some real truth to it, but I don't think many except true believers will find it totally convincing.

[Peter · Rating 5 out of 5]

The topic of financial crisis, causes and consequences, has received considerable attention over the years, almost entirely from economists with an historical perspective—until recently, the mathematically oriented economics profession has behaved as if no such things happen. Outstanding examples of the genre are Irving Fisher’s article The Debt-Deflation Theory of Great Depressions (1933), Charles Kindleberger’s Manias, Panics and Crashes: A History of Financial Crises (1978), and Barry Eichengreen’s recent Hall of Mirrors: The Great Depression, The Great Recession, and the Uses—and Misuses—of History (2015—see review).

To these one should add Gary Gorton’s Misunderstanding Financial Crises: Why We Don’t See Them Coming (2012). Gorton, a professor of finance at Yale’s School of Management, is a specialist in banking and finance. In this slim but compelling book Gorton asks, “Why did the economics profession fail to see the financial crisis of 2007-2008?” His take on that abysmal failure is well worth reading, and its consistency with the history of financial crises is solid. Perhaps the reason the profession failed is that economic history receives so little attention in graduate schools and beyond.

This will be a (too) long review because, as a financial economist, the theme attracts me. But let me start with one unsettling conclusion that I draw from this and similar works: no amount of regulation and oversight will end financial crises—not Dodd-Frank, not any future legislation! There are at least three reasons. First, none of us has a crystal ball to determine just when a “bubble” exists, so at any one time there will be a wide variety of opinions about the financial system’s fragility. Second, in the absence of a crystal ball there will be insufficient consensus to allow a democracy to act in mitigation of a bubble until it is well advanced, or has already burst. Third, all regulation implicitly assumes that the financial system will remain unchanged, but regulation itself changes the financial system. Thus, regulation is aimed at the last crisis, not a future crisis.

This last point is controversial, so I’ll dwell on it a moment. The banking acts of the 1930s focused on the commercial banking system as it existed at that time. Banking regulations were little changed for 75 years even though the nature of “banking” changed dramatically from commercial banking to investment banking. The problem is that the very act of regulating an industry changes that industry in ways regulators don’t see—shadow banking was rising under the regulators’ radar, and it was at the heart of the 2007-2008 debacle. This regulatory failure has a natural cause: few bureaucrats in Congress or in regulatory agencies are visionaries—they are rules-creators or rules-enforcers; but visionaries are a dime a dozen in the private sector of a market economy—they will always keep ahead of the regulators. Gorton’s book gives many examples of that.

So why did the profession fail so abysmally? Yes, Gorton argues, academic economists had become too enamored of elegant mathematical models that ignored financial crises (essentially because nobody knows how to “model” sudden discontinuities.) Yes, he argues, market innovations like securitized mortgages (Collateralized Mortgage Obligations, or CMOs) had fooled the rating agencies and, with them, investors, into complaisance. Yes, the Quiet Period from 1934 to 2006, during which no financial crises occurred, lulled experts into thinking that New Deal banking regulation and the 1914 advent the Federal Reserve System had eliminated financial crises. Yes, the Great Moderation from the mid-1980s to 2007—during which the business cycle appeared to be eliminated—lulled experts into thinking that the cycle itself was a thing of the past, so financial failures arising from business failures weren’t a problem.

But, he argues, these were not fundamental causes of the professional neglect of crises, particularly of the danger signs in 2007. In fact, he says, financial crises are all at heart a consequence of banking problems. Banks have traditionally been in the business of selling riskless debt (deposits, notes) redeemable on demand, and using the funds to buy risky and often illiquid assets. The common element in all financial crises is loss of confidence in the quality of the notes and deposits, leading to runs on banks in which those who hold bank debt (notes and deposits) seek to convert it into something of more stable value (gold, national bank notes, Federal Reserve Notes). The 2007-2008 crisis was no different; only the definition of “banks” had changed.

This problem arises from the fundamental nature of banks—they issue very short-term “on demand” deposits or (in the old days) notes, and invest the proceeds into longer-term and often illiquid loans and investments with variable values. Uncertainty about the value of bank debt (deposits or notes) creates runs which, if widespread, create two kinds of problems: first, lack of liquidity—the banks must obtain cash to meet customers’ demands, but if a sufficient amount isn’t available (or loans from others aren’t available) the bank must sell assets to meet depositor demands. Those last-resort sales depress asset prices and signal that there might be liquidity problems at other banks; second, insolvency--as banks sell assets to get cash for customer withdrawals, asset prices fall and the bank’s capital diminishes; they are insolvent—unable to absorb further losses—and must find a buyer (liquidate) or declare bankruptcy.

The banking legislation of the 1930s—-particularly the Glass-Stegal Act that prevented banks from holding risky financial institutions like investment banks, and the advent of deposit insurance that insulated banks from panics—-dealt well with the problems of commercial banks as they were then structured. But these were inadequate for the modern financial system because commercial banks were not the problem. Instead, the shadow banking system—-institutions like mutual funds, investment banks, and brokerage firms—-had emerged as a direct result of past commercial bank regulation. The shadow banks, like old-time commercial banks, relied on short-term borrowing to finance holding of longer term and less-readily marketable securities. The shadow banks were regulated lightly by the SEC and their activities were opaque—-unlike commercial banks, which reported details of their balance sheets to the Fed weekly, shadow banks reported quarterly to the SEC; they also had no on-site bank examiners to keep them on track. In effect, the banking system had evolved into a system beneath the radar of both the government and the the public. What the economics profession missed was the remarkable financial innovation that had dramatically changed the financial landscape since the 1930s.

Gorton builds his story on the backbone of an historical analysis of the U. S. banking system, from the era of Free Banking (1837-63) through the National Banking era (1864-1913) into the Federal Reserve System era (1914-present). Each of these eras strengthened the banking system but focused entirely on commercial banks.

In the Free Banking era a bank could be easily started by anyone with minimal capital--once an easily obtained state banking charter was issued, the bank could issue its own bank notes in exchange for specie (gold or silver). The specie thus acquired was used in three ways: (1) a portion was kept in specie to meet future needs of note holders who wanted to convert; (2) a portion was invested in state bonds to be held by the state banking commission as safe assets for sale in the event the gold specie reserve was insufficient to meet withdrawal claims; and (3) the excess was used to make (often) risky loans. Banks in this period had minimal reporting requirements and were not audited, so the quality of their assets was unknown. When a locally bad time came (crop failure) and borrowers (farmers) defaulted—-or if the state defaulted on its bonds—-the bank’s note holders flocked to the bank to convert their notes to specie before the bank suspended convertibility; those left holding notes found their claims either worthless or much reduced in price. Under this system, the notes of each bank varied widely in price—-notes on, say, the Bank of the Okefenokee Swamp were worth less in Philadelphia than in the Swamp, and the discount on notes varied widely as economic conditions and risk assessments changed. Thus, there was no stable standard of value—-a dollar was not a dollar. As a rule, in this period banking panics were local events, not widely transmitted--the Banking Panic of 1857 was the only widespread panic in the Free Banking era.

The National Banking Act of 1864 created “national banks” that met specific criteria in the form of capital, reserves, reporting, and auditing. Reserves were held as specie (coin) or as federal bonds (which were much less likely to default than state bonds); notes were no longer specific to the bank but were “national bank notes,” essentially federal notes like our present-day Federal Reserve Notes. A bank’s ability to issue notes was limited by its deposit of reserves with the Treasury; those deposits could be drawn on to meet withdrawals. National bank notes were convertible into specie (gold or silver coins) and were legal tender backed by the U.S. Treasury.

The 1864 Act eliminated the multiplicity of individual bank notes as well as the question of any discounts on notes—a dollar was now a dollar. It was thought that this would end banking panics but financial innovation got in the way—-banks began issuing demand deposits (checking accounts) in lieu of notes. Demand deposits were convertible into national bank notes, but since a bank’s deposits with the Treasury limited its note issue, there was a limit on this convertibility. The weakness associated with convertibility of notes into specie now morphed into problems with convertibility of deposits into notes—-but the weak link in bank confidence was still there. The Panic of 1873 was the first indication that panics were not a thing of the past: depositors feared bank failures and converted deposits to notes. Notes outstanding rose, but banks could not convert more than a certain amount of deposits into notes (“the currency was not elastic”). Furthermore, as deposits were converted to national bank notes lending by banks had to fall, creating tight credit and weakening the business sector. Gorton notes that the creation of deposits by banks was an early form of an emerging shadow banking system.

The Federal Reserve Era was a result of the Panic of 1907. The Federal Reserve Act created Federal Reserve Notes to replace national bank notes, and the Fed’s mandate was to provide “…an elastic currency,” that is, the amount of FRB notes was to expand as “business needs” required. So in a panic, when a bank’s depositors wanted to convert deposits into FRB notes, the Fed would expand the amount of FRB notes by lending to banks; bank depositors, satisfied that enough notes were available, would stop their runs on the banks. The Banking Panics of 1931 and 1933 showed that this was not a solution, and a variety of banking regulations were adopted in the 1930s to bolster banks. These regulations, and the Federal Reserve System’s timely interventions, appeared to have solved the problem—-until 2007-2008.

The 2007-2008 crisis was preceded by a large increase in credit in the form of securitized debt obligations, called Asset-Backed Securities (ABS). Investment banks bought bundles of securities like mortgages or consumer loans (auto installment loans, student loans, credit card loans) and sold them to a Special Purpose Vehicle (SPV), an entity that the investment bank created to hold and manage the loans. Then the rights to any income and capital gains on the SPVs were sold to investors as Collateralized Debt Obligations (CDOs); CDOs were of two broad types--Collateralized Mortgage Obligations (CMOs) and Collateralized Loan Obligations (CLOs) for consumer and corporate debt. Investors held a diversified portfolio of loans that were individually risky, but, through the magic of diversification, were thought to have low risk.

There were two fundamental problems. First, because risk seemed to magically disappear, the SPVs began to concentrate on very high-risk loans with high yields, like subprime mortgages; this allowed investors to “reach for return” by buying high-yield (and high-risk) securities without (it was thought) actually experiencing increased risk. Second, the SPVs were financed by very short-tem loans like Asset-Backed Commercial Paper and Repurchase Agreements, loans that had to be paid off quickly or renewed. Thus, investment banks were borrowing short-term to invest in long-term risky and illiquid assets—-they were like the old-time commercial banks, issuing low-risk deposits and investing in high-risk business and industrial loans.

The shadow banks, like the old commercial banks, had high liquidity risk—-if their credit was cut off, they would have to find new sources of credit, or, failing that, sell assets at losses or declare bankruptcy. They also had high capital value risk on any assets they owned in preparation for creating an SPV and selling its CDOs. Finally, they faced reputational risk
The trigger was problems at the premier investment bank Bear Stearns beginning in August of 2007. Bear Stearns was a leader in the purchase, packaging, and sale of subprime mortgages. But since 2005 the prices of subprime mortgages had been falling, so the quality of the collateral on Bear Stearns short-term borrowing (repos, commercial paper) weakened. As the troubles became more obvious, lenders refused to renew their loans, leaving Bear Stearns unable to finance the SPVs and forcing sales of SPV assets, thus putting additional pressure on subprime mortgage prices, hence widening the problem. Bear Stearns initially tried to support its SPVs, but it finally had to announce that it would file for bankruptcy. In March, 2008, the Federal Reserve System worked out a sale of Bear Stearns to J. P. Morgan Chase, a commercial bank, along with a line of credit to Chase to allow it to work out Bear Stearns’s bad positions.

The cat was out of the bag. Runs on other investment banks with similar problems began: AIG, an insurance giant, had sold a gigantic amount of credit default swaps—-contracts in which it would pay the holder if a firm failed; with the increasing probability that other institutions would fail, AIG faced large losses and its creditors refused to renew loans; Lehman Brothers, an investment bank heavily exposed in the CDO market, had similar. In fact, AIG had sold a large amount of credit default swaps on Lehman. Both would fail unless the Federal Reserve System stepped in and provided credit—-and their failure would trigger a general panic as all investment banks faced runs. On September 15, 2008, Lehman failed after the Federal Reserve System refused assistance. Immediately a major money market fund that had invested heavily in Lehman’s commercial paper “broke the buck,” raising questions about the safety of money market funds. AIG's liability to holders of Lehman credit default swaps balloned. Credit to AIG froze and the government stepped in to save it through loans and additional capital.

The Federal Reserve System had let one bank fail and had saved one bank. What would it do with the next problem bank? It was a coin toss. No longer could people believe in the viability of major financial institutions, or in the implicit obligation of their government to keep banks afloat. The floodgates opened and a full scale financial panic was under way. Short-tem credit froze, and with no short-term lending, there could be no long-term lending.

There is, of course, much more to Gorton’s story, and he tells it with both a sense of history and an awareness of the fragility of financial markets, where a knife-edge distance exists between general security and widespread panic. His history of banking regulations—-capital requirements, reserve requirements, bank examinations, and so on—-is interesting to the specialist and an education for the layman. One point stands out: banking crises are about cash, that is, liquidity; solvency is rarely the issue until a crisis is well advanced, if at all.

This is an economic history that proves Santana’s dictum that those who ignore history are bound to repeat it.

Five stars!

[Eugene Kernes · Rating 3 out of 5]

Is This An Overview?
Financial crises are inherent in a market system. Financial crises occurred before and after a centralized currency, before and after the development of a central bank. Each crisis has different characteristics, but a common structural cause. Financial crises occur when people and firms do not want the product of a bank. The product of a bank, is debt. Debt is used for transactions. Different eras have different forms of bank debt, such as banknotes and repurchase agreements. The debt is not riskless, and banks do not hold the cash needed to repay all the debt, as they lend out cash.

Debt is used for transactions, which depends on the lack of secrecy. That each party knows the value of the collateral being exchanged, and neither knows more than the other. But when people become uncertain of the value of bank debt, people trigger a bank run. No matter the form of the debt, crisis are caused by an avoidance of what the bank have to offer. Crisis are triggered by the panic that ensues.

A panic caused by problems with the banks, rather than panics causing the bank problems. A financial crisis is when many consumers and firms are demanding more cash from the banking system than what the banks can provide, a contractual demand that the banking system cannot satisfy. Events that cause a crisis are unpredictable, but the financial systems’ fragility can be observed. Financial system fragility depends on the amount of credit outstanding. Before a financial crisis, there is a credit boom that increases the financial systems’ fragility.

Caveats?
This book provides an introduction to the cause of financial crises. More research would be needed understand any specific crisis.

The book can be difficult to read. There are a variety of excerpts provided to be historic evidence to claims, but they have mixed results. The excerpts can help explain the situation or be distracting.

[todd · Rating 4 out of 5]

This is a fine perspective on a longstanding problem: “What causes financial panics and why aren’t economists better at predicting them?” The broadest conclusion about causes rests at the feet of leverage and excesses in the banking sector. This breaks little new ground relative to Kindleberger, but points out two important developments: 1) Bank panics have evolved from largely retail driven local events caused by particular bank problems to institutionally driven systematic events caused by concerns about the quality of assets and liquidity; and 2) Panics almost always happen at the peak of a business cycle.

His perspective on the economics profession is alone worth the time spent on this book. Gordon carefully explains the problem with equilibrium based models and the disturbing trend among more and more economists to almost purposefully ignore history. Second tier mathematical exercises that are viewed as “complete” are preferable to actually understanding the behavior of economic actors. This has been a long-standing criticism of the profession, but adds punch when considering the ongoing impotence of people who are supposed experts in the act of assessing the likelihood of a crisis.

An economist friend of mine recommended the book to me, suggesting that I start with the last two chapters, as they contain the bulk of the substance about financial crises and how economists (don’t? can’t?) formally treat them. That is good advice, which I did not follow, preferring to respect the author’s intentions. The problem is that Gorton spends a great deal more time than necessary going through banking history, drawing out details that add some historical color but don’t really help understand the broader themes. The bottom line is that the book tries to do two things and both suffer a bit because of this dual effort. Perhaps Gorton should have written the (even more) detailed history of banking as a full blown book and then focused the big panic discussion into a tightly crafted monograph.

Hopefully people will work through the early parts of the book in order to get to the punch line because it is important. Gorton is an academic and was an advisor to AIG Financial Products so he brings perspectives to the discussion that most people cannot combine. Many will read the conclusions and say, “Well, that’s pretty obvious,” but few of those readers would have come to those conclusions independently. This little book is far from perfect, but it’s a worthwhile read.

[Frans Saxén · Rating 4 out of 5]

Gary Gorton's book on financial crisis gives in little more than 200 pages an excellent and digestible overview of financial crisis, primarily as they manifested themselves in the US from the 19th century until today. Similarly to Reinhart and Rogoff's story of sovereign crisis, Gorton shows that this time really wasn't all that different. Banking is inherently unstable due to maturity mismatch, and only good regulation can ease this problem.

According to Gorton, a major reason for economists not foreseeing the crisis that started in 2007 was a lack of good data. On the one hand, most US macroeconomic timeseries were from after the Great Depression and thus didn't contain any episodes of financial crisis. This meant that macroeconomic models, which tried to explain this data really didn't have to take into account the financial system. On the other hand, the shadow banking system that started to grow as a result of low interest rates was as its name implies, in the shadows. Thus data on transactions were scant, and regulators didn't have much to follow. While regulation is crucial according to Gorton, it should not be overdone. Completely preventing crisis can have high costs in terms of foregone growth.

Overall, the book is an easy read, providing a good narrative of approximately 200 years of American banking history, thus providing a good background on the latest crisis.

[Lance Cahill · Rating 4 out of 5]

A wonderful exposition of Gorton's view that all financial crises have the same underlying cause of a bank run. In the Great Depression, it was a run on bank deposits. In the recent financial crisis, it was a run on asset-backed securities, repurchase agreements, and structured investment vehicles.

The title comes from Gorton's contention that economics has not contended well with what causes this run - how do households and firms form expectations and beliefs of when it is rational to demand more collateral or cash - in a period of model building focused on what Gorton calls the 'Quiet Period' (approx 1934 - 2007). As such, the economics profession has not been influential in what regulatory framework would be robust in mitigating the risk of crises. Note: This is distinguished from the ability of predicting when a crisis will happen, this being one of the central complaints against economics registered in the past five years.

While it is common in academic literature on history, extended passages from contemporaries became somewhat tiresome. The better chapters were economically written with extended footnotes for further review.

Lots of interesting and dispassionate research is being conducted and one can hope that this research will help guide future policy responses and frameworks.

[Virginprune · Rating 4 out of 5]

This is a great book for anyone who wants a simple primer on why we have banks and why we have financial crises. It's not too heavy but is based on extensive research and experience (notes and references are pushed to the back, a little awkwardly in two separate sections) and is amply illustrated with helpful charts and panels.
I spotted a couple of technical slips (something that can get in the way of picking up new concepts), but essentially this is a rewarding read both for practitioners and those with no prior understanding. Being actually readable, it's a useful antidote to the masses of populist ignorance-peddling that's been going on.
Focussing almost exclusively on the US meant that the book is concise and easier to follow, but I would welcome an extension which takes on the global story of financial crises. Much has already been written about cross-border effects of dollarisation in trade, financing etc. but it would be interesting to compare the domestic stories around the world. To what extent is the US story representative and what, if any, significant differences exist?
We're heading into a new paradigm, forced by regulation, innovation and (indeed) deregulation, amongst other powerful forces, and this timely sketch of how we got here is an interesting input for anyone curious how the world of finance will change in the coming decade and beyond.

[Bob Beck · Rating 3 out of 5]

A whole lot of numbers, charts, and graphs, with associated analysis, to prove the point,perhaps inadvertently, that opportunistic greed lies at the heart of most crises. Editorializing, we don't see crises coming because we don't want to; it's bad for the numbers. The reader needs some bank management knowledge to navigate this book (primarily, the reversal of assets and liabilities for a bank).

[Steve · Rating 4 out of 5]

I do recommend having plenty of sleep and coffee before attempting to read this book, but it is very informative and thought-provoking. The author suggests that economists should spend more time researching the structures and data of the economy than spinning elaborate mathematical theories. He also correctly notes that economists who are ignorant of economic history will constantly be surprised by crises.

[Jason Furman · Rating 5 out of 5]

Worth reading as a history of banking failures, an explanation of the crisis and a recommendation for reform--all embedded in a consistent argument around the centrality of runs on money.

[Mills College Library]

338.542 G675 2012