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November/December 2010, 
Vol. 92, No. 6
Posted 2010-11-01

Haircuts

by Gary Gorton and Andrew Metrick

“When confidence is lost, liquidity dries up.” The authors investigate the meaning of “confidence” and “liquidity” in the context of the recent financial crisis, which they maintain is a manifestation of an age-old problem with private money creation: banking panics. The authors explain this problem and provide some evidence with respect to the recent crisis.