Alan S. Blinder is a national treasure. The Princeton economics professor has served at the Congressional Budget Office, on President Bill Clinton’s Council of Economic Advisers and as vice chairman of the Federal Reserve Board. He appears regularly on television and in the op-ed pages of major newspapers. He invariably sees what’s really going on and has a gift for explaining it without being blinded by party or ideology.
Blinder can also take credit for having been early to see the housing bubble for what it really was — part of a larger credit bubble — and putting forward numerous good ideas for dealing with it once it burst. As a former Fed official and adviser to a number of investment firms, he is the rare academic who understands the interplay of the economy and financial markets. If anyone has standing to write about the causes and consequences of the recent financial crisis, it is Blinder.
Unfortunately for him, he is a bit late to the game. My shelves already groan under the weight of fine books by journalists and other economists, along with the memoirs of key policymakers that are beginning to roll off the presses. Blinder, as he readily acknowledges, relies heavily on those who published before him. While “After the Music Stopped” serves a useful purpose of synthesizing that earlier reporting into an accessible narrative, he doesn’t break much new ground. (The title is taken from the infamous quote of Citigroup Chairman Chuck Prince, who, when asked in July 2007 why his bank was continuing to lend into a bubble he knew would burst, explained that “as long as the music is playing, you’ve got to get up and dance.”)
Blinder takes it as his mission to disabuse readers of some of the popular myths about the financial crisis: that it was about only subprime mortgages, that it was caused primarily by the Federal Reserve’s loose money policies and the greedy folly at Fannie Mae and Freddie Mac, that it wouldn’t have happened if the Depression-era Glass-Steagall Act had been left in place. He painstakingly demolishes the notion that taxpayers lost hundreds of billions of dollars through bailouts and exposes the Republican lie that stimulus funds did nothing for the economy.
Blinder’s strength is in his patient and clear explication. His explanation of the extreme leverage — borrowing — inherent in most derivatives is the best I have seen. He deftly explains naked credit default swaps — the financial equivalent of fire insurance taken out by hundreds of people on a house they did not own but suspected might burn — and shows how they turned problem loans into a financial-system disaster. He uses simple charts and graphs to show that much of the money “printed” by the Fed over the past few years as part of its “quantitative easing” has wound up back at the Fed in the form of excess bank reserves that banks were unable or unwilling to lend out. He even succeeds in explaining why George W. Bush Treasury Secretary Hank Paulson was right when he wanted to use government money to buy up troubled assets from banks — the original purpose of the much-maligned Troubled Assets Relief Program — rather than provide banks with new capital (Blinder and I may be the last two people on the planet who still believe this).
“After the Music Stopped” has three central points.
Point one: that the financial crisis was the result of too much leverage, too much complexity and too much Wall Street compensation, tragically combined with way too little regulation.
Point two: that the extraordinary steps taken by the Fed and the Treasury were remarkably effective, in terms of their speed and cost, in stemming the crisis and preventing another Great Depression.
Blinder’s third point is perhaps the most original but also the one made with the least conviction and clarity: that the steps necessary to deal with the crisis were so contrary to American practice and values that they were bound to trigger a political backlash that would prolong the recession and raise resistance to the regulatory reform necessary to prevent it all from happening again. Unfortunately, Blinder undermines his conclusion with contradictory arguments about the failure of the Obama administration to explain and defend the bailouts and the stimulus. Better messaging wouldn’t have changed much. The reality is that there was no way to save the economy without saving the financial system, and there was no way to save the financial system without rescuing a bunch of unworthy banks, bankers and creditors.
This wouldn’t be a Washington book if Blinder didn’t use it to settle some old scores. As a vice chairman of the Fed who was routinely ignored by its chairman, Alan Greenspan, Blinder takes the opportunity to ridicule Greenspan’s lack of interest in bank regulation, his refusal to acknowledge the existence of bubbles and his support of tax cuts in 2001 that laid the groundwork for today’s fiscal crisis. Blinder also manages a few good digs at Larry Summers, with whom he clashed while serving at the White House when Summers was at Treasury. In the bureaucratic battle between Treasury Secretary Tim Geithner andSheila Bair, the chairman of the Federal Deposit Insurance Corp., Blinder scores it a split decision: Bair was wrong to insist that bank creditors take some losses but right to push harder on avoiding mortgage foreclosures.
I have four broad complaints about “After the Music Stopped.”
The first has to do with Blinder’s affection for cliche. There is an unwritten rule in the writing trade against quoting Bismarck on the making of laws and sausages, Dorothy on not being in Kansas anymore, Pogo on meeting the enemy and your grandmother saying, “Oy vey.” The same goes for expressions like “tooth and nail,” “with a vengeance” and “only time will tell.” Unfortunately, neither Blinder nor his editors seem to be aware of them.
The book is also needlessly long. Blinder spends the last hundred pages catching us up on recent Fed policy, the budget battles in Washington and the euro crisis, all of which wander far afield from his original purpose. It’s probably also no surprise that this former Fed official puts too much stock in the influence of the interest-setting of central banks.
My biggest complaint, however, is that Blinder fails to place the credit bubble in the context of the massive global-trade imbalances of the past two decades. He is right to identify excessive borrowing as the original sin behind the financial crisis. But that borrowing was, in many respects, the inevitable response of American consumers, investors and taxpayers to a global arrangement in which the rest of the world was throwing cheap money our way in the hope that we would live beyond our means by borrowing it to buy more of their exported goods. The link between the trade deficit and the financial crisis may not be self-evident to most of us, but it surely ought to be to a macroeconomist of Blinder’s stature. And the fact that these imbalances persist might have helped Blinder explain why the U.S. and global economies have still not recovered.
Alan S. Blinder will discuss and sign “After the Music Stopped” at Politics and Prose on Monday at 7 p.m.
AFTER THE MUSIC STOPPED
The Financial Crisis, the Response
and the Work Ahead
By Alan S. Blinder
Penguin Press. 476 pp. $29.95