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Monday, June 9, 2014

Anatomy of an economic meltdown

The 2007-2008 crisis wasn't due to "immoral, greedy bankers who created toxic assets for which they got inflated ratings and sold to stupid investors," Gorton said. "If banker greed causes crises, we'd have one every week." (Photo by Wilford Harewood.)

By Leslie King, Emory Report

What caused the financial crisis that began in 2007, that time of cutbacks, job losses and housing foreclosures? And how can another crisis be prevented?

Yale professor Gary Gorton discussed causes and effects of recessions in a workshop on financial and monetary history held May 21 at Goizueta Business School.

Gorton came to national attention in September 2010 when then-U.S. Federal Reserve Chairman Ben Bernanke, testifying before a national commission on the fiscal crisis, referenced Gorton's work as recommended reading for understanding the crisis.

One small factor that set off the panic in 2007 was the news media, Gorton said.

"The press didn't really do a very good job of explaining what was happening. But it's hard to blame them. They called economists and economists had no idea. If you call the experts and the experts don't know, how are you supposed to know? And the press — they're never going to get it right because the people who know aren't going to talk and the people who talk don't know," he explained.

"And in Congress, these people have nine million things they have to be experts on; they can't be experts on everything. In a lot of ways, it was a failure of the economics profession to explain things apparently in a way that the public could understand and that will lead to good policy."

Read more of Gorton's analysis in Emory Report.

Gorton recommends Franklin Roosevelt's first radio address, in March 1933, to learn some of the mechanics behind both the Great Recession and the 2007-2008 crisis. Click on the YouTube video below to listen: 

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