Gary Gorton’s ‘Misunderstanding Financial Crises’

August 9, 2012

Gary Gorton's "The Panic of 2007" is perhaps the best single place to go to understand how problems in the subprime housing market almost toppled the global financial system. So I was excited to receive an early copy of his next book, "Misunderstanding Financial Crises: Why We Don't See Them Coming." There wasn't a good excerpt on page 69. But there was one on page 99:

Debt during crisis is not the debt of noncrisis times. This idea is anathema to many people, including many economists, who argue that the failure to enforce this obligation creates "moral hazard," in the form of the increased risk borrowers take because they know they'll have the option to renege on their obligations. But it is an option only when everyone, the whole economy, is in trouble. That event is not predictable.

"Misunderstanding Financial Crises" comes out on Nov. 1. To preorder the book, head here. For more on the page 69 -- and, occasionally, the page 99 -- test, head here.

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Dylan Matthews · August 9, 2012