Current Events

Slapped by the Invisible Hand

Gary Gorton’s Slapped by the Invisible Hand: The Panic of 2007 is a unique and unprecedented look at the recent economic meltdown. The book opens with a self-disclosure revealing his access to data inaccessible to other academics: “Starting in 1996, I also consulted for AIG Financial Products, where I worked on structured credit, credit derivatives, and commodity futures.”

Originally written for a conference of the Federal Reserve, Gorton puts the financial crisis into a relatively simple framework of banking panic and analyzes both the effects and causes. He explains how the securitized-banking system, a nexus of financial markets and instruments unknown to most people, stand at the heart of the financial crisis.

Despite the Panic of 2007 ahs few difference from the Panics of 1907 and 1893. Gorton shows that in 2007, “Most people had never heard of the markets that were involved, didn’t know how they worked, or what their purposes were. Terms like subprime mortgage, asset-backed commercial paper conduit, structured investment vehicle, credit derivative, securitization, or repo market were meaningless.”

While we continue to explore the recession, Gorton’s book will prove to be a helpful tool.

 

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