Mark Thoma directs us to David Warsh on Gorton and Holmstrom’s view of the role of banking. I’ve written about this view in severalplaces. My own view of banking is very different and here is a quick summary of my key points.
The source of Gorton and Holmstrom’s errors: Taking U.S. banking history as a model
In my view Gorton and Holmstrom err by basing their view of what banking is on the pre-Fed U.S banking system. Nobody argues that the U.S. represented a “state-of-the-art” banking system in the late 19th century. In fact, in the late 19th century the U.S. banking system was still recovering from the reputational consequences of the combination of state and bank defaults in the 1840s that had led many Europeans to conclude that American institutions facilitated fraud. By the end of the 19th century, however, the U.S. did have access to…
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Utopia, you are standing in it! 
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