By Gary Gorton
ISBN-10: 0199734151
ISBN-13: 9780199734153
Initially written for a convention of the Federal Reserve, Gary Gorton's "The Panic of 2007" garnered huge, immense consciousness and is taken into account by means of many to be the main convincing tackle the new financial meltdown. Now, in Slapped by way of the Invisible Hand, Gorton builds upon this seminal paintings, explaining how the securitized-banking process, the nexus of economic markets and tools unknown to most folks, stands on the center of the monetary problem.
Gorton indicates that the Panic of 2007 was once no longer so diverse from the Panics of 1907 or of 1893, other than that, in 2007, most folk had by no means heard of the markets that have been concerned, didn't know the way they labored, or what their reasons have been. phrases like subprime personal loan, asset-backed advertisement paper conduit, dependent funding motor vehicle, credits spinoff, securitization, or repo marketplace have been meaningless. during this brilliant quantity, Gorton makes all of this crystal transparent. He indicates that the securitized banking approach is, in truth, a true banking method, permitting institutional traders and corporations to make huge, immense, momentary deposits. yet as any banking process, it used to be at risk of a panic. certainly the occasions beginning in August 2007 can most sensible be understood now not as a retail panic related to contributors, yet as a wholesale panic related to associations, the place huge monetary businesses "ran" on different monetary agencies, making the approach bancrupt.
An authority on banking panics, Gorton is the fitting individual to give an explanation for the monetary calamity of 2007. certainly, because the challenge spread out, he used to be operating inside of an establishment that performed a imperative function within the cave in. therefore, this booklet offers the unheard of and important standpoint of a most sensible student who was once additionally a key insider.
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Extra info for Slapped by the Invisible Hand: The Panic of 2007 (Financial Management Association Survey and Synthesis Series)
Example text
Collateralized intraday credit is one way to mitigate this type of risk. See Zhou (2000) for background. On central bank collateral policies, see Chailloux, Gray, and McCaughrin (2008). In the last 15 years or so, there has been a shift toward real-time gross settlement (RTGS) systems, usually involving accounts at a central bank. See BIS (2005a, b). “Real-time” means that there is no waiting period; the transaction is settled as soon as it is processed. 5 Derivatives Collateral Usage, $Billion.
That is, as discussed above, the demand for information-insensitive securities to use as collateral for various purposes may also have played a role. Third, bankruptcy costs are minimized with off-balance-sheet financing. But the offbalance-sheet debt is not tax-advantaged for the originator. See Gorton and 42 slapped by the invisible hand Souleles (2006). Thus, one would expect that companies with lower credit ratings would find it optimal to securitize. Finally, the innovation in structuring the special-purpose vehicle as an off-balance-sheet vehicle may have been the driving force for growth.
The same mechanism operated this time. The “depositors” were firms that deposited money in the form of (reverse) repo and received a bond as collateral. Prior to the panic, repo haircuts were zero. The run occurred in the repo market. The Run on Repo Uncertain about the solvency of counterparties, repo depositors became concerned that the collateral bonds might not be liquid; if all firms wanted to hold cash—a flight to quality—then collateral would have to decline in price to find buyers. This is the crucial link between the subprime shock and other asset categories.
Slapped by the Invisible Hand: The Panic of 2007 (Financial Management Association Survey and Synthesis Series) by Gary Gorton
by Ronald
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