NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Questions and Answers about the Financial Crisis

Gary B. Gorton

NBER Working Paper No. 15787
Issued in February 2010
NBER Program(s):   AP   CF   ME

All bond prices plummeted (spreads rose) during the financial crisis, not just the prices of subprime- related bonds. These price declines were due to a banking panic in which institutional investors and firms refused to renew sale and repurchase agreements (repo) - short-term, collateralized, agreements that the Fed rightly used to count as money. Collateral for repo was, to a large extent, securitized bonds. Firms were forced to sell assets as a result of the banking panic, reducing bond prices and creating losses. There is nothing mysterious or irrational about the panic. There were genuine fears about the locations of subprime risk concentrations among counterparties. This banking system (the "shadow" or "parallel" banking system) - repo based on securitization - is a genuine banking system, as large as the traditional, regulated and banking system. It is of critical importance to the economy because it is the funding basis for the traditional banking system. Without it, traditional banks will not lend and credit, which is essential for job creation, will not be created.

download in pdf format
   (488 K)

email paper

This paper is available as PDF (488 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15787

Users who downloaded this paper also downloaded these:
Caballero w15636 The "Other" Imbalance and the Financial Crisis
Reinhart and Rogoff w14656 The Aftermath of Financial Crises
Gorton and Metrick w15273 Haircuts
Brunnermeier w14612 Deciphering the Liquidity and Credit Crunch 2007-08
Taylor w14631 The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us