Slapped by the Invisible Hand: The Panic of 2007 [Archive.org URL]

Gary B. Gorton of Yale University’s School of Management explains in some detail how in August 2007, the financial markets found themselves in the grip of a phenomenon thought to have been rendered impossible by various safeguards: a banking panic of the sort that rocked global capitalism a dozen times between 1837 and 1907. This time, however, the spectacle did not consist of individual depositors lined up outside the locked doors of retail banks, but rather firms creating runs on other firms. Instead of some familiar physical address, this occurred at the intersection of the securitization business and the shadow banking system, two enormous industries that had barely existed 25 years earlier.

The story of how a long “quiet period” in American banking — roughly 75 years without a single panic — gave way to a seismic near-collapse after years of tumultuous behind-the-scenes change makes for fascinating reading. The implications for how the authorities might have acted differently is even more interesting.

Slapped by the Invisible Hand is not an easy book, but that’s mainly because much of the material is unfamiliar, and some of it is abstruse. It contains enough tables and diagrams to help readers follow the argument where it leads (to some equations, naturally), along with a timeline to help readers reconstruct what they knew in the past three years and when they understood its significance. It’s possible to skip the hard parts and still master the frame. If you do, this is the book that, some years from now, you will be most glad to have read. [s+b annotation]

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