Gary Gorton – Slapped by the Invisible Hand. The Panic of 2007

Gary Gorton – Slapped by the Invisible Hand. The Panic of 2007

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. The securitized banking system is, in fact, a real banking system, allowing institutional investors and firms to make large, 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 as a panic-a wholesale panic, rather than a retail panic-involving financial firms “running” on other financial firms, resulting in the system becoming insolvent. As the financial crisis unfolded, Gorton was working inside an institution that played a central role in the collapse; thus this book presents the unparalleled perspective of a top scholar who was also a central insider.

REVIEW

Gorton’s book contains extensive insights into the crisis, and anyone interested in undertanding what went wrong and why is recommended to read it. (Bill Allen, THE BUSINESS ECONOMIST, Vol 42, No 2)

Slapped by the Invisible Hand is essential to understanding the deep weakness in the banking sector that led to the financial crisis. Like consumer banks before the Great Depression, the ‘shadow banking market’ is vulnerable to runs and panics and hysteria, and we are all, in turn, vulnerable to it. By looking beyond this financial crisis to the systemic flaws that make us vulnerable to all sorts of crises, Gary Gorton has created a necessary guidebook for what’s happened, and what needs to be done. (Ezra Klein, Washington Post)

Gorton has produced the clearest account yet of what has happened…Slapped By the Invisible Hand is not a conventional retrospective. Instead it is a real-time chronicle of what the authorities were told at key points in the drama by a practitioner who was steeped in the history of banking as well…it is a major contribution. (David Warsh, Economic Principals)

It’s must-reading for anyone who wants to understand the recent economic unpleasantness. (Matthew Yglesias, Think Progress)

Gary Gorton has written an important book, one that clearly identifies the issues surrounding the recent financial crisis and separates them from the ongoing macroeconomic policy turmoil…quite an accomplishment, given that many of us are still trying to figure out happened in earlier panics and crises… By narrowly focusing on the events and institutions of the Panic of 2007, how the economy got to where it is today becomes much clearer. (EH.net)

Think about it. If porcine greed, by itself, is enough to crash the financial sector, why doesn’t Wall Street crash every year? For that matter, why should the crash of the subprime market result in a recession so much worse than the one that followed, say, the dotcom bubble? To answer these questions, you should read [this] book. (National Post)

Scholars like Gorton do not get enough attention as we try to understand what caused the crisis and how to prevent a repeat he is one of the people that will play an important role in shaping reform. (TheStreet.com)

The definitive history of the 2007 meltdown. (The Electric Review)

Slapped by the Invisible Hand is certainly “groundbreaking”, it is also technical…[If you] have longed to understand the difference between CDO and CDS, and MBS and SPV, then this could still be the book for you. (Victoria Bateman, Times Higher Education Supplement.)

ABOUT THE AUTHOR

Gary B. Gorton is Professor of Finance for the Yale School of Management, previously taught at Wharton for 24 years, and worked in the Federal Reserve System. He is also a former consultant to AIG Financial Products.

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