Misunderstanding Financial Crises: Why We Don’t See Them Coming

In This Review

Misunderstanding Financial Crises: Why We Don't See Them Coming
by Gary B. Gorton
Oxford University Press, USA, 2012
296 pp. $29.95

Why did economists fail to foresee the 2008 global financial crisis, especially considering that in retrospect there were numerous signs of financial fragility? In this engaging history, Gorton answers that question through an exercise in what might be called the epistemology of modern economics. He argues that economists were blindsided by events because they were preoccupied with elegant mathematical models that incorporated few elements of financial reality. Moreover, they had been lulled into complacency during the data-rich, prosperous era that preceded the crisis. And they had little knowledge of history; indeed, many harbored a conviction that history is irrelevant to the study of modern economies. But the book is much more than an indictment. Gorton provides an analytic history of financial crises in the United States, with occasional references to those in other countries, detailing their common traits and revealing what he calls the “plumbing” that shaped financial transactions in different eras.