The Maze of Banking: History, Theory, Crisis

by Gary B. Gorton

Overview

After the financial crisis of 2007-2008, analysts continue to question the security of banking sectors in nations in Europe, Latin America, Asia, and Africa. Why do such crises recur? What is it about the accumulation of bank debt that potentially jeopardizes national and global banking systems?

There is no one better-equipped to answer such questions than Gary Gorton, who has been studying financial crises since his PhD thesis in 1983. The Maze of Banking contains a collection of his academic papers on the subjects of banks, banking, and financial crises. The papers in this volume span almost 175 years of U.S. banking history, from pre-U.S. Civil War private bank notes issued during the U.S. Free Banking Era (1837-1863), followed by the U.S. National Banking Era (1863-1914) before there was a central bank, through loan sales, securitization, and the financial crisis of 2007-2008. Banking changed profoundly during these 175 years, yet it did not change in fundamental ways. The forms of money changed, resulting in associated changes in the information structure of the economy. Bank debt evolved as an instrument for storing value, smoothing consumption, and transactions, but its fundamental nature did not change. In all its forms, it is vulnerable to bank runs without government intervention. Comprehensive and informative, the collection is the definitive volume on the history of the U.S. banking system.

These papers provide the framework for understanding how the financial crisis of 2007-2008 developed and steps to promote a stable banking industry, thereby preventing future economic crises. The Maze of Banking is essential reading material for students and academics with an interest in economics, finance, and the history of banking.

Product Details

ISBN-13:	9780190204839
Publisher:	Oxford University Press
Publication date:	04/02/2015
Edition description:	New Edition
Pages:	690
Product dimensions:	9.70(w) x 6.50(h) x 2.00(d)

About the Author

Gary B. Gorton is the Frederick Frank Class of 1954 Professor of Finance at the Yale School of Management. He is the author of Slapped by the Invisible Hand: The Panic of 2007 and Misunderstanding Financial Crises. He has consulted for the U.S. Board of Governors of the Federal Reserve System, various U.S. Federal Reserve Banks, the Bank of England, the Bank of Japan, and the Central Bank of Turkey as well as AIG Financial Products from 1996 until 2008. Dr. Gorton received his PhD in Economics from the University of Rochester. In the field of economics, he received Master's degrees at the University of Rochester and Cleveland State University as well as a Master's degree in Chinese Studies from the University of Michigan.

Table of Contents

1. Introduction

PART I: BANK DEBT

2. "Financial Intermediaries and Liquidity Creation," with George Pennacchi, Journal of Finance 45:1 (March 1990): 49-72.

3. "Reputation Formation in Early Bank Note Markets," Journal of Political Economy, Vol. 104, No. 2, (April 1996): 346-397.

4. "Pricing Free Bank Notes," Journal of Monetary Economics 44 (1999): 33-64

5. "The Development of Opacity in U.S. Banking," Yale Journal of Regulation, forthcoming.


PART II: BANKING PANICS

6. "Bank Suspension of Convertibility," Journal of Monetary Economics 15(2) (March 1985): 177-93.

7. "Banking Panics and Business Cycles," Oxford Economic Papers 40 (December 1988), 751-81;

8. "Clearinghouses and the Origin of Central Banking in the U.S.," Journal of Economic History 45:2 (June 1985): 277-83.

9. "The Joint Production of Confidence: Endogenous Regulation and Nineteenth Century Commercial Bank Clearinghouses," with Don Mullineaux, Journal of Money, Credit and Banking 19:4 (November 1987): 458-68.

10. "Banking Panics and the Endogeneity of Central Banking," with Lixin Huang, Journal of Monetary Economics, Vol. 53 (7) (October 2006): 1613-1629.

11. "Liquidity, Efficiency, and Bank Bailouts" with Lixin Huang, American Economic Review 94 (3) (June 2004).


PART III: WHAT DO BANKS DO?

12. "The Design of Bank Loan Contracts," with James Kahn, Review of Financial Studies 13 (2000): 331-364.

13. "Universal Banking and the Performance of German Firms," with Frank Schmid, Journal of Financial Economics 58 (2000): 3-28.

14. "Bank Credit Cycles," with Ping He, Review of Economic Studies 75(4) (October 2008), 1181-1214.


PART IV: CHANGE IN BANKING

15. "Corporate Control, Portfolio Choice, and the Decline of Banking," with Richard Rosen, Journal of Finance, Vol. 50, No. 5 (December 1995): 1377-1420.

16. "Banks and Loan Sales: Marketing Nonmarketable Assets," with George Pennacchi, Journal of Monetary Economics 35 (3) (June 1995): 389-411.

17. "Special Purpose Vehicles and Securitization," with Nicholas S. Souleles, chapter in The Risks of Financial Institutions, edited by Rene Stulz and Mark Carey (University of Chicago Press; 2006).


PART V: THE CRISIS OF 2007-2008

18. "Questions and Answers about the Financial Crisis" (Prepared for the U.S. Financial Crisis Inquiry Commission)

19. "Collateral Crises," with Guillermo Ordonez, American Economic Review 104(2) (Februaray 2014): 1-37.

20. "Some Reflections on the Recent Financial Crisis," chapter in Trade, Globalization and Development: Essays in Honor of Kalyan Sanyal, edited by Sugata Marjit and Rajat Acharya (Springer Verlag; forthcoming). 10

Editorial Reviews

"Gary Gorton is a master at combining financial history and economic theory. His work has been invaluable in illuminating the deep causes of financial crises and in helping to guide the policy response."

Ben S. Bernanke, Distinguished Fellow in Residence, Economic Studies Program, Brookings Institution and Former Chairman of the Federal Reserve

"The Maze of Banking demonstrates the great depth and relevance of Gary Gorton's research on banking and financial crises. Gary's research combines insights from modern economic theory and the insights of fresh empirical work guided by the techniques of economic history. By coming at an understanding of the financial system from two very different methodologies, Gorton's research produces insights about the past which are both new and still empirically valid in the modern financial system. Reading Gary's collected works together yields new lessons which were unclear from reading them separately over the years. The whole does appear to be greater than the sum of the individual parts."

Douglas W. Diamond, Merton H Miller Distinguished Service Professor, Booth School of Business, University of Chicago

"Read this anthology of papers written over the past thirty years and you will understand why Gary Gorton has been the leading voice in explaining the recent financial crisis. The sweeping perspective provides the basis for a coherent, comprehensive interpretation of current events, devoid of undue emotion and hasty conclusions. The Maze of Banking is a testimony to the depth of Gorton's analysis and the perseverance of his research."

Bengt Holmström, Paul A. Samuelson Professor of Economics, Massachusetts Institute of Technology

"To understand banking and financial crises, especially in their historical context, you really need to read Gary Gorton. Insights leap from every page."

Mervyn King, former Governor of the Bank of England

"Gary Gorton is unique in his ability to bring together fundamental insights from both history and theory to shed light on the essential nature of-and the risks created by-financial intermediation. The papers in this volume make it clear why he has been one of the most important voices on one of the most pressing economic policy issues of our time."

Jeremy C. Stein, Department of Economics, Harvard University and Former Member of the Federal Open Market Committee

From the Publisher