Gary Gorton’s *Misunderstanding Financial Crises*

Everything by Gary Gorton is worth reading.  I am not sure when this book is due out (Amazon claims Nov.2012), but it is not out yet.  The link is here.

Imagine a rewriting of earlier American financial history, though the lens of our recent financial crisis and extant ideas about bank runs through the shadow banking system.  Here are two short bits:

And interestingly, the figure below shows that capital input was actually higher in countries that did not have capital requirements.

…Bank capital was not the focus of bank regulation until recently.  In the 1980s regulators began focusing on bank capital as a buffer against idiosyncratic bank failures and associated losses that could have bankrupted the deposit insurance fund.  But it has been recognized that historically systemic bank crises are about cash.  They can be prevented or mitigated by the design of regulatory infrastructure, whether it is public or private.  They cannot be prevented by bank capital.

Recommended!