A review by inquiry_from_an_anti_library
Misunderstanding Financial Crises: Why We Don't See Them Coming by Gary B. Gorton

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3.0

Is This An Overview?

Financial crises are inherent in a market system.  Financial crises occurred before and after a centralized currency, before and after the development of a central bank.  Each crisis has different characteristics, but a common structural cause.  Financial crises occur when people and firms do not want the product of a bank.  The product of a bank, is debt.  Debt is used for transactions.  Different eras have different forms of bank debt, such as banknotes and repurchase agreements.  The debt is not riskless, and banks do not hold the cash needed to repay all the debt, as they lend out cash. 

 

Debt is used for transactions, which depends on the lack of secrecy.  That each party knows the value of the collateral being exchanged, and neither knows more than the other.  But when people become uncertain of the value of bank debt, people trigger a bank run.  No matter the form of the debt, crisis are caused by an avoidance of what the bank have to offer.  Crisis are triggered by the panic that ensues. 

 

A panic caused by problems with the banks, rather than panics causing the bank problems.  A financial crisis is when many consumers and firms are demanding more cash from the banking system than what the banks can provide, a contractual demand that the banking system cannot satisfy.  Events that cause a crisis are unpredictable, but the financial systems’ fragility can be observed.  Financial system fragility depends on the amount of credit outstanding.  Before a financial crisis, there is a credit boom that increases the financial systems’ fragility. 

 

Caveats?

This book provides an introduction to the cause of financial crises.  More research would be needed understand any specific crisis.  

 

The book can be difficult to read.  There are a variety of excerpts provided to be historic evidence to claims, but they have mixed results.  The excerpts can help explain the situation or be distracting.