Review of Fighting Financial Crises: Learning from the Past by Gary B. Gorton and Ellis W. Tallman. Chicago: University of Chicago Press, 2018
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“Financial crises are here to stay,” write Gary B. Gorton and Ellis W. Tallman in Fighting Financial Crises: Learning from the Past (University of Chicago Press, 2018). Because crises are inevitable, it is important to understand why they occur and how to respond to them. The authors are leading authorities on the history and economics of financial crises, and thus well worth listening to.
Gorton and Tallman contend that financial crises are inevitable because market economies depend on short-term debt and such debt is vulnerable to runs. Crises occur when information-insensitive debt suddenly becomes information-sensitive, that is, when debt holders, who previously were willing to hold the debt almost without question, suddenly want out. Much of their book focuses on the banking panics of the National Banking era.1As they describe, unexpected increases in business failures or other adverse events led to bank runs, when bank depositors became suspicious about the backing of their...
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