Let's Hear It for the Standard Narrative.

• Author: McKinley, Vern

Fighting Financial Crises: Learning from the Past

By Gary B. Gorton and Ellis W. Tallman

256 pp.; University of Chicago Press, 2018

The year 2018 marked the passing of a decade since the lowest point of the financial crisis. Observers of the financial industry rehashed the various narratives of the crisis as part of a burst of anniversary commemorations. The dominant narrative about the policy response to the crisis (although not necessarily the most accurate or fact-based one) is what might be called the standard narrative: the interventions of the financial authorities during 2008 and 2009 likely saved us from another Great Depression. There are variants of this standard narrative, but most of its adherents believe that either the response (consisting of bailouts and massive financial support) was measured and effective, or else the authorities should have been even more aggressive in their interventions.

This book, Fighting Financial Crises by economists Gary Gorton and Ellis Tallman, supports the latter version of the standard narrative. Interestingly, the book liberally cites fellow standard narrative advocates Ben Bernanke and Timothy Geithner, who were the chief architects of the U.S. response. Bernanke even provided a blurb for the book's jacket cover.

Gorton is a professor at the Yale School of Management and is widely known for advancing the argument that the financial crisis was a "run on the repo market." He was also an adviser during the crisis to American Insurance Group, which was one of the largest government bailout recipients during the crisis. Tallman is the director of research at the Federal Reserve Bank of Cleveland and is known for his work on the history of banking panics and liquidity lending during financial crises.

The premise of Fighting Financial Crises is that, consistent with the authors' prior research, there is a "plug and chug" formula for responding to financial crises. Whether we look at the panics of the Gilded Age or the recent crisis, this formula requires that the financial authorities need only do some basic research to determine the appropriate policy response to the crisis. Specifically, they need to:

* Find the short-term debt causing the instability (run).

* Suppress individual institution financial information.

* Open emergency lending facilities.

* Prevent systemic (too-big-to-fail) institutions from failing by bailing them out.

* Circumvent any laws and regulations that stand in the way of...