Gary Gorton on the Financial Crisis

Yale professor Gary Gorton has an excellent Q&A on the financial crisis. I highly recommend it. It’s long but readable and very thorough.
Here’s the WSJ:

It’s wrong to blame this crisis on subprime mortgage lending, he says. Rather, this crisis is best seen as the latest of a series of banking crises throughout history. Banks borrow (or take deposits) short-term, promising to give money to their customers if they want it. They invest that money long-term, lending to businesses and consumers. This “intermediation” process is vital to the smooth functioning of the economy. But if depositors or others from whom banks have borrowed short-term demand their money back — a demand often sparked by panic — banks can’t instantly respond, and bad things ensue. In the old days, these runs were prompted by anxious depositors. Deposit insurance helped solve that problem. In our time, banks were reliant on short-term borrowing known as repurchase agreements — and the folks who held those panicked.

Tyler Cowen has more.

Posted by Eddy Elfenbein on February 23rd, 2010 at 8:52 am

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