Saturday 2018-06-16

Misunderstanding Financial Crises by Gary Gorton

The title is somewhat misleading -- this is a history of bank panics in the United States, and Gorton's view that the 2008 financial crisis was severe due to the failure of the repo market for several large shadow-banks.

Gorton also points out that the political dynamics of banking follow a pendulum: if we worry about contagion and prevent banks from failing in one crisis, then in the next we worry about moral hazard and let some banks fail -- and vice versa. Hence, in the next crisis, regulators will worry more about contagion ("Another Lehman!") and step in to save banks.

Gorton also includes this chart from Richard Stone's 1984 Nobel Prize lecture with the implicit admonishment to make sure that you got lots of data and not just experience.