Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007 by Gary Gorton (SSRN)
The current panic involved financial firms ‘running’ on other financial firms by not renewing sale and repurchase agreements (repo) or increasing the repo margin (‘haircut’), forcing massive deleveraging, and resulting in the banking system being insolvent. The earlier episodes have many features in common with the current crisis, and examination of history can help understand the current situation and guide thoughts about reform of bank regulation. New regulation can facilitate the functioning of the shadow banking system, making it less vulnerable to panic.
Some days I don’t understand how my own interests come about.
