Illustration by Daniel Pelavin
Gary B. Gorton
Slapped by the Invisible Hand: The Panic of 2007
(Oxford University Press, 2010)
Henry M. Paulson Jr.
On the Brink: Inside the Race to Stop the Collapse of the Global Financial System
(Business Plus, 2010)
Gregory Zuckerman
The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
(Broadway Books, 2009)
Sebastian Mallaby
More Money than God: Hedge Funds and the Making of a New Elite
(Penguin Press, 2010)
Raghuram G. Rajan
Fault Lines: How Hidden Fractures Still Threaten the World Economy
(Princeton University Press, 2010)
Simon Johnson and James Kwak
13 Bankers: The Wall Street Takeover and the Next Financial Meltdown
(Pantheon Books, 2010)
The great uncertainty of all data in war is a peculiar difficulty, because all action must, to a certain extent, be planned in a mere twilight, which in addition not infrequently — like the effect of a fog or moonshine — gives to things exaggerated dimensions and unnatural appearance.
— Carl von Clausewitz
Something happened to us during these last three years, a momentous event, perhaps even a turning point in the history of global capitalism. But what, exactly? Everyone remembers the apex of the crisis, when Lehman Brothers perished, Bank of America bought Merrill Lynch, the Fed bailed out American International Group, and the U.S. Treasury Department took control of the U.S. government–sponsored loan companies Fannie Mae and Freddie Mac. In the time that has elapsed since a brief but heart-stopping paralysis behind the scenes in August 2007 set the stage for the later public event, a certain amount of sorting out has occurred.
An avalanche of good writing, much of it published this year, has been devoted to trying to decipher the chain reaction that took place between August 2007 and September 2008. These accounts may be divided into a few broad categories. There are narratives of the crisis itself, the analyses and prescriptions of economists, origin stories focused on various participants in the drama (the shorts, the quants, the hedge funds), and, of course, any number of corporate obituaries.
None of these books fully answer the question of what to expect as a long-term result of the crisis, but several of them, and one in particular, seem to go to the heart of the puzzle of what exactly happened to get it started.
The Narrative Framed
In the best business book of the year on the economy, Slapped by the Invisible Hand: The Panic of 2007, 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. After all, if the meltdown was mainly an old-fashioned banking panic at a higher level of abstraction, it should have been easier to fix.
