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Showing 1-10 of 17 reviews(Verified Purchases). See all 22 reviews
on November 27, 2012
Gorton makes four very important points:

(1) Financial crises always arise when the public (individuals or businesses) lose faith in bank debt. According to Gorton, creating debt is the main business of banls. It is this debt that enables our economy to function. Unfortunately, in times of rapid expansion, banks create debt too quickly and so become fragile.

(2) Financial crises are always characterized by bank runs. These can be very visible, e.g. depositors lining up to get their money back. Or they can be invisible, e.g. lenders in the shadow banking system, who typically lend for a day or so at a time, refusing to roll over the loans to suspect banks. It follows that the real problem is not banks that are under-capitalized, but banks that are illiquid, i.e. they don't have enough cash on hand to meet demands. (They could have lots of illiquid assets, but so what?)

(3) The banking sector is so essential to the economy that governments will not let it go under. In this sense, banks have been "too big to fail" for at least two centuries. The tool used by the government evolves over time -- suspensions of withdrawals and "bank holidays" in the nineteenth and early twentieth centuries, the Fed as lender of last resort and deposit insurance in the twentieth century, bailouts via purchase of toxic assets in the twenty-first. Each time the popular reaction is fury: Populists wanted to hang the bankers a hundred and fifty years ago, a hundred years ago, etc.

(4) Both fortunately and unfortunately, financial innovations allow banks to create new forms of bank debt to satisfy the growing demand for such debt. Asset-backed securities and CDOs are just the latest in a long line, e.g. checking accounts, credit cards, and so on. Government is usually one or two steps behind. Indeed, with the disappearance of the physical queue of depositors clamoring to be paid, the government now has difficulty recognizing when a bank run occurs, and tends to intervene too late.

Gorton's solution is more regulation. That may be controversial, but Gorton's case is very well argued. He examines in detail financial crises over the past two hundred years (although he limits himself almost exclusively to the U.S.). The lessons he draws lead him to the above conclusions, plus a number of other insights.

Unfortunately, as with his previous book, Slapped by the Invisible Hand, this book is very badly written and could use a strong editor or even a rewrite. It is repetitious in many places, the author jumps around a bit, and may sentences are just plain awkward. When he quotes at length a nineteenth-century author, that comes as a relief. For this reason, I'm giving it four stars instead of the five that the content richly deserves.
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on September 26, 2013
This book is a masterpiece in placing the Global Financial Crisis in the context of previous crises and explaining how the crisis came about and, most importantly, why economists and policy analysts failed to predict it. Very compelling. On the downside, the build up to the final most interesting chapters takes a lot of perseverance to work through the detailed explanations of previous banking crises, with quite a lot of apparent repetition. Extremely well worth reading to fully understand why almost everyone failed to predict or even understand that the crisis could happen in the modern U.S. economy
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on December 12, 2012
This could have been a terrific book. What it needs is the firm hand of a good editor. Unfortunately, the first half of it reads like a collection of lecture notes loosely stitched together. Sadly, the main points are repeated over and over, and the flow of the text is interrupted with extremely lengthy quotes that often add rather little to the point being made. Many should have been footnotes, rather than part of the text.

I initially found the book difficult to read, not because of the content, but because of the poor writing style and organization. Fortunately, as the author nears the end of the book both style and organization improve markedly

That aside, what the author has to say is very important, highly relevant to understanding the financial crisis, and highly pertinent to rethinking the central questions that economics should be tackling. Sadly, too many academic economics are more concerning with impressing their academic colleagues with their mathematical prowess, displayed in papers and books that address theoretical questions with little practical relevance, but that are highly publishable, especially when reviewed by disciplinary colleagues with the same proclivities.

So I give the book three stars for style, and 5 for content. Average: four stars.

I'm usually not so critical, but the author missed a real opportunity for excellence. Here's my advice: read the first half rapidly, so as not to get bogged down, and be sure to get to the end. It is worth it.
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on July 19, 2015
This is a great and challenging book. The observations about bank-like asset-liability mixtures are particularly important. So is his historical review of recessions and financial crises and how they fit together.
As someone who also writes in the field, I do not agree with all of Prof. Gorton's conclusions. But Prof. Gorton writes so well and so interestingly that I recommend this book to anyone interested in the subject.
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on April 23, 2016
This is a great book written by one of a select group of people who understand the shadow banking system, if you know what that is, it's a great wonkish read. Might be a bit of an uphill struggle if you're not intereted in the inner workings of the global banking/finance system. But the author really does know what he's talking about.
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on December 20, 2012
This is a highly informative analysis of American financial crises and bank runs since the 18th Century. Gorton's historical perspective, as opposed to the purely journalistic approach of most "insider" books--though he too was an insider at AIG--allows him to describe the 2007 crisis as the latest in a long series of sudden losses of public confidence in financial institutions. Gorton explains why it is hard to prevent such crises without absolutely foolproof government insurance ("bailouts") against every loss of every type on Main Street and Wall Street, a backup that is almost impossible to arrange because the government's own solvency isn't absolute. Nor is anyone else's in a money-based economy. There was no bank run in 2007 (the runs were on the investment houses) because we trust the FDIC to keep our bank deposits fully safe. I'll let you follow the details of this argument yourself, but I guarantee you will learn something.

I deduct one star because of the writing. For one thing, like most contemporary books--all of these comments apply to most contemporary books--this one seems not to have been professionally copy-edited. Sometimes it reads like a first draft. I don't mean Gorton is a bad writer. Even the most famous and skillful writers (including Shakespeare, Balzac, Dickens, Tolstoy, Stephen King, etc.) are not competent to edit their own manuscripts. Maybe there are no professional editors any more. Maybe publishers don't care to pay for them. In Gorton's case, thorough editing would have eliminated not only the misused words and confusing sentences but more importantly some of the wordiness and repetition. Again like many current books this one is probably half again as long as it needs to be to make its case. Often it seems that each sentence or even paragraph is totally unaware that other sentences or paragraphs in the book exist and have already used a certain fact or made a similar point (like the causes of bank runs). Modern non-fiction in particular often seems to lack a sense of overall organization. Like a dumbed-down documentary on the History Channel where the story begins all over again after every commercial, it's Back to Basics in every chapter.

Still, four out of five ain't bad. If you are interested in economic ideas and the real roots of the Great Recession, Gorton's book will amply reward your patience.
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on August 17, 2015
opinions of the great recession. everyone should read it.
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on February 13, 2013
In many ways an excellent book: historical perspective, indispensable to the subject, mastery of the intricacies of the shadow banking system, consequences of banking runs.
Disappointing in some ways: banks are described as creating their own money (they do), but the need for funding, the amount of funding and the funding risk are never clearly described, so it is difficult to see the difference between the author's treatment of banks and the conventional textbook one. I think the author knows much more than he shows in the book.
Very good general reading, very readable, complete overview rather than just stories. The first of a second generation of books on the 2007 crisis?
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on April 6, 2015
Interesting points made in the book. Everyone wshould read this book.
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on November 10, 2012
'Misunderstanding Financial Crises' provides a much needed perspective from which the financial upheaval and economic downturn of 2008 are usefully understandable. An easy and quick read, 'Misunderstanding Financial Crises' provides the basis for re-configuring our financial regulatory structure. This is an important book for those wishing a real understanding of what happened in 2008 and may happen again, if we do not learn how to regulate an ever evolving financial sector, without destroying the benefits of new financial innovations.
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