90 FAITH & ECONOMICS
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Reviewed by John Lunn, Hope College
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best contributions among the scholarly books. Unlike many other
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issues like the global savings glut cited by Federal Reserve System Chair
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Depression. Gorton looks at the shadow banking system that developed in
recent decades and compares what happened in the recent crisis to panics
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In his introduction, Gorton claims that he was in a unique position
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Gorton provides the two papers mentioned above, although in reverse
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ways. Previous bank runs involved people trying to pull their money out
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the withdrawal requests. The recent run involved banks and corporations
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Gorton argues that the shadow banking system that developed over
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Traditional checking or savings accounts are inadequate because they
are not insured. But they want something similar to a checking account:
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has been met in the repurchase market, or repo market.
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the transaction. The bond received can be used as collateral in some other
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and reusing the collateral, called rehypothecation, is similar to writing a
check.
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mechanism.
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well and in a way that shows it is not inherently devious or subject to
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card receivables, and insurance receivables, as well as mortgages and auto
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insensitive, though not riskless, like demand deposits. The most senior
92 FAITH & ECONOMICS
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teaser rates to induce unsuspecting people to take a mortgage they cannot
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bad risk, then the banks could not renew the mortgage. Gorton notes that
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subprime market should have declined in value. Initially, the impact was
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who did not know whether their banks were sound, and went to withdraw
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Gorton argues that policy responses to the crisis need to be related to
the problems that caused the crisis. He claims that the subprime mortgage
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mortgages were dependent on house price appreciation. He continues,
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and structures, investors could not easily determine the location and extent
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to which the savings-investment process no longer relies so heavily on
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innovation tends to be driven by regulation and taxes. When banking
93
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they had charters that were valuable because the government restricted
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charters became less valuable and the banks were willing to take on more
risk. Gorton argues that returning to a system where banks had valuable
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Wall Street and shows how problems in the real economy, particularly
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problems and misaligned incentives play roles in the narrative. I believe
this is more enlightening than seeking out whom to blame. Gorton’s book
is not the complete story, however, since the huge increase in housing
prices that took place in the years leading up to 2007 is not explained by
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scholar.
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to look at the crisis and have the same knee-jerk reaction that many popular
press writers have, namely, claiming that the crisis was caused by greedy
Wall Street bankers. It is easy to demonize the people we think brought this
94 FAITH & ECONOMICS
on. But Gorton’s work shows that it was due less to personalities or bad
people than it was to mistakes in how subprime mortgage-backed securities
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References
Rajan, R.G. Fault lines: How hidden fractures still threaten the
world economy. Princeton: Princeton University Press.
Reinhart, C.M., & Rogoff, K.S. This time is different: Eight
FHQWXULHVRIÀQDQFLDOIROO\. Princeton: Princeton University Press. Q