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

By Gary B. Gorton | Go to book overview

VII. ECONOMIC
THEORY
WITHOUT
HISTORY

The phenomena of a volcanic eruption or of a great earthquake are
eagerly investigated by the men of science for what light they may
cast upon the workings of the laws of nature. Not less reasonable
may it be for the student of economics to avail himself of periodic
financial upheavals for acquiring a broader judgment upon the laws
of finance.

—Henry Clews, 18911

Despite the frequency of financial crises in U.S. history and elsewhere, economists thought that the era of financial crises in the United States was over. So crises are not central to modern macroeconomics or financial economics. It is not that economists ignored crises, but they largely studied the Quiet Period, because they thought it was the most relevant period and, importantly, that because it is the most recent period, it provided the most data.

Economists did not see that the economy had changed, and they misunderstood the vulnerability of bank debt. So the markets that were central to the recent financial crisis went unnoticed. Since the development of these markets was below the surface, it seemed the Quiet Period would last forever. When the financial crisis did occur, the explanations were superficial and

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

Table of contents

  • Title Page iii
  • Contents v
  • Preface vii
  • I- Introduction 3
  • II- Creating the Quiet Period 10
  • III- Financial Crises 29
  • IV- Liquidity and Secrets 45
  • V- Credit Booms and Manias 59
  • VI- The Timing of Crises 74
  • VII- Economic Theory without History 87
  • VIII- Debt during Crises 98
  • IX- The Quiet Period and Its End 125
  • X- Moral Hazard and Too-Big­ to-Fail 134
  • XL- Bank Capital 151
  • XII- Fat Cats, Crisis Costs, and the Paradox of Financial Crises 165
  • XIII- The Panic of 2007–8 182
  • XIV- The Theory and Practice of Seeing 200
  • Bibliographic Notes 213
  • Notes 239
  • References 247
  • Index 273
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