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

By Gary B. Gorton | Go to book overview

XIII. THE PANIC OF
2007–8

[Former Connecticut senator Christopher] Dodd described the
worst part of the crisis in September of 2008, the “night of a most
extraordinary meeting, with Treasury Secretary Henry Paulson,
Federal Reserve Chairman Ben Bernanke, and leaders of both
parties in then-House Speaker Nancy Pelosi’s meeting room.
Bernanke said: ‘Unless you act in the next few days the financial
system in the U.S. and the rest of the world will melt down.’ The air
left the room” he said. “There were ageless moments of quiet.”

—Kathleen McBride

The global financial crisis that began in the United States in the summer of 2007 was triggered by a bank run, just like those of 1837, 1857, 1873, 1893, 1907, and 1933. That’s why I have spent so much time on the history of these crises.

This crisis was the worst since the Great Depression, and it has had devastating effects that continue today. The crisis began with a financial panic, a run on short-term money market instruments. It was a systemic event. Fed governor Ben Bernanke reported that of the thirteen “most important financial institutions in the United States, twelve were at risk of failure within a period of a week or two” (Financial Crisis Inquiry Commission 2011, 354). Asset prices plummeted, credit markets froze, production and investment sharply declined, and millions lost their jobs. It appeared for a time that we were on the verge of a depression, but central banks engaged in extraordinary efforts

-182-

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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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