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.
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