Average Reviews:
(More customer reviews)Gorton has made an important contribution to the debate on the Financial Crisis (and I was eager to read his book because of it). He argues that government guarantees of retail deposits enacted in the 1930s, and not capital adequacy requirements, (temporarily) ended previously common panicked withdrawals from the entire banking system. As uninsured short-term institutional deposits have grown and become the primary source of funds for money center banking, it was just a matter of time before these runs began anew. But the book just about starts and ends there. At a critical junctures like ours, the country needs clear thinkers like Gorton to provide leadership by addressing the issues comprehensively, speaking out against demagoguery and making recommendations. Otherwise, why step to the microphone with a book instead of the papers he already published? Gordon scarcely draws conclusions and makes no substantial recommendations!
He points out why repurchase agreement failed as an alternative to government guarantees but goes no further. He shows (in many pages of unnecessary detail) that structured finance contributed to the difficulty of knowing how much (sub-prime) risk each bank held but he doesn't analyze whether credit default swaps and flawed credit ratings also contributed to the confusion. Nor does he show that the value of withdrawing funds to reduce risk in fear of others doing likewise wouldn't have occurred no matter the availability of information. He admits that better information likely would not have solved the problem but he offers no alternatives.
He claims, with little support (although surely its true) , that increased capital adequacy requirements will simply contract the boundaries of banking but he doesn't show where, speculate how the resulting unfilled customer needs with be filled and whether these alternatives would be good or bad for the economy in terms of reducing systematic risk. In this context you'd also like to hear his evaluation of convertible bank debt as an alterative solution to the problem but again, nothing. (Increased reserves would likely curtail mortgage lending.) He asserts that the reduced value of monopoly rent conferred by previously restricted bank charters caused banks to take more risk. If his recommendation is to return to something akin to the restrictions of old, it would take a lot more than just pointing out the issue to show how, why and to what effect.
If you put forward a theory, you also have to show why it's better than alternative explanations but he devotes only a couple pages to pooh-poohing the alternative theories that originate-to-distribute and misaligned incentives reduced lending standards (although I agree with his conclusions) . Except for noting that sub-prime finance served as a trigger, he never addresses the role of Freddie and Fannie in spurring on sub-prime mortgage lending and the extent to which the crisis could have been averted were that not the case. (Presumably we can infer Gordon thinks something else just would have come along.) The role of the trade deficit in the build-up of uninsured short-term institutional deposits is never mentioned. If the answer is for the government to guarantee institutional deposits should we also be guaranteeing offshore deposits into US financial institutions?
If you've read Gorton's papers, there is nothing more here. If you haven't, it's a lot to slog through for what could have been summarized in a much shorter piece. Sentences like, "This agent cares about the intertemporal marginal rate of substitution, so the pricing kernel weights the expected returns on the demand deposits in determining the currency-deposit ratio." and many others like it, are not helpful to the public debate. If you've been sucked in by the superficial logic of demagogues... unfortunately I haven't yet seen a better alternative by a serious thinker.
Click Here to see more reviews about: Slapped by the Invisible Hand: The Panic of 2007 (Financial Management Association Survey and Synthesis)
Originally written for a conference of the Federal Reserve, Gary Gorton's "The Panic of 2007" garnered enormous attention and is considered by many to be the most convincing take on the recent economic meltdown. Now, in Slapped by the Invisible Hand, Gorton builds upon this seminal work, explaining how the securitized-banking system, the nexus of financial markets and instruments unknown to most people, stands at the heart of the financial crisis. Gorton shows that the Panic of 2007 was not so different from the Panics of 1907 or of 1893, except that, in 2007, most people had never heard of the markets that were involved, didn't know how they worked, or what their purposes were. Terms like subprime mortgage, asset-backed commercial paper conduit, structured investment vehicle, credit derivative, securitization, or repo market were meaningless. In this superb volume, Gorton makes all of this crystal clear. He shows that the securitized banking system is, in fact, a real banking system, allowing institutional investors and firms to make enormous, short-term deposits. But as any banking system, it was vulnerable to a panic. Indeed the events starting in August 2007 can best be understood not as a retail panic involving individuals, but as a wholesale panic involving institutions, where large financial firms "ran" on other financial firms, making the system insolvent. An authority on banking panics, Gorton is the ideal person to explain the financial calamity of 2007. Indeed, as the crisis unfolded, he was working inside an institution that played a central role in the collapse. Thus, this book presents the unparalleled and invaluable perspective of a top scholar who was also a key insider.
0 comments:
Post a Comment