One source of cold comfort in the recent uproar is the number of really good books it has generated. I'd start with Charles R. Morris or Mark Zandi or Barry Ritholtz, maybe Wolfgang Munchau. For the housing bubble that underlay it all, there's Alyssa Katz. Although they are not as central I suppose I'd add Gillian Tett on financial innovation and William D. Cohan on the fall of Beqr Stearns. There many others., although I think you can probably skip insider self-justifications like this and this. And popular as it may be, I don't think attentive students need to give away time to this which pretty much rehashes stuff you have already seen in the newspaper. But I suppose I should add in useful backgrounders like those of Sean Carr and Liaquat Ahamed (hey, talk about timing).
Comes now a new wave, starting perhaps with Yves Smith's ECONned, rich in insider technical knowledge, laced out with a bit of old-Testament prophetic rage. You could tag Yves book under "rapacity," but the difference between Yves and (say) Michael Moore is that Yves actually knows what she is talking about (she's intellectually honest, too--at least once I caught her deliberately kicking a hole in her own argument).
Comes now Gary Gorton's Slapped by the Invisible Hand which displays, among many virtues, the engaging quality of offering almost no overlap with any of the others. Well: of course the outline of the story is the same. But Gary addresses a question mentioned by others (including Paul Krugman) yet until now, hardly addressed: how did a not-very-big potatoes misfortune like the bursting of the real estate bubble metastasize into the worst catastrophe since the Great Depression? Recall we've had any number of crises before now--S&L, Far East, LTCM, Japan--none of which extended into the larger economy.
Gorton, who is a student of bank runs, offers a (to me) novel suggestion: a bank run. I think one should be excused for detecting a hint of special pleading here, but the fact is that Gorton makes a powerful case for his view. He begins with a sketch of 19th-Century bank runs (and shows how, though frequent, they were often well managed). He shifts his focus from there to the repo market--almost entirely a creature of the last two decades of the 20th Century. And he tries how to show the repo market functioned as the checking-account bank of choice for huge corporations (if you want to keep $500 million in petty cash, you can't expect to deal with Bob's Bank at the Sign of the Sock). When housing went down, the loss tainted repos. But which, and how much? Nobody knew, and that is the kind of ignorance that provokes bank runs.
It's an elegant argument, presented with refreshing clarity and I look forward to seeing it appraised and torn apart by others with skills better than mine. But a couple of points I can showcase now. One how much useful insight he offers on a couple of topics (seemingly) not germane to his main topic. And the other, how much he leaves out.
Leaves in: Gorton argues the real estate bust is not coextensive with the market meltdown, but that the bust was the shock that sent the larger system into disarray. En route he offers the best account I've seen of how "subprime" worked and in particular how it (a) depended on a perpetual rise of real estate values and (b) rested on a complex of transactions that were designed to fail.
Although it isn't strictly germane to his point, Gorton also offers an elegant account of the originate-to-distribute model, and in paraticular, the question whether originate-to-distribute created instability by offloading risk from originators to distributees. Gorton thinks it did not; I don't find his case fully persuasive: even by his own measure, there seems to be a lot of risk that was simply offloaded. But he does make clear that the issue of loss-bearing in originate-to-distribute is a lot more complicated than it looks from the outside (like Greek prosody).
Both of these excursions are wonderful but beyond that, it's even more of a wonder what he feels he does not have to discuss. There is next to nothing here about the structure of incentives in banking (Yves Smith) or the moral hazard of downside guarantees (Barry Ritholtz) or most of the underlying realities of the housing market (Alyssa Katz). I offer this point not as a criticism: on Gorton's own showing, you can make a pretty good case for the proposition that they didn't really matter: it was the bank run wot done it, and the rest is just window dressing. This, at least, is an issue in which I look forward to some informed debate.
Meanwhile, on to Kwak/Johnson and Dean Baker. There seems to be no end of entertainment here.
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