The title of Alan S Blinder’s highly readable new book on the financial crisis (yes, a readable book about economics) refers to an infamous remark made in July 2007 by Charles O Prince III, then the chief executive of Citigroup. “When the music stops, in terms of liquidity,” he said, “things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
Of course, the music did come to an abrupt stop soon. For the US and the world, the consequences of the fiscal meltdown of 2008 were calamitous, pushing America into the worst economic hole since the Great Depression and leaving us – years later – still coping with lingering unemployment, sluggish growth and huge deficit worries.
Mr Blinder, a professor of economics and public affairs at Princeton and a former vice chairman of the Federal Reserve Board, reminds us that the disaster was years in the making. If large portions of After the Music Stopped feel familiar, the book nonetheless benefits from its wide-angle perspective, as well as from its vantage point in time, now that it’s possible to assess the fallout of decisions that were being made on the run by White House and Treasury officials under extraordinary pressures. It also benefits from Mr Blinder’s cleareyed prose and nimble gifts as an explainer.
Mr Blinder tells it as he sees it. He calls the former Federal Reserve chairman, Alan Greenspan, and the Clinton-era Treasury secretaries, Robert E Rubin and Lawrence H Summers, to account for their antiregulatory stances, which laid the groundwork for the market excesses and snowballing fiscal disasters that would explode in 2008.
He identifies Fannie Mae and Freddie Mac – with their low-income and subprime mortgage portfolios – as being only “supporting actors” in the debacle. And he calls the collapse of Lehman Brothers on September 15, 2008, the “watershed event of the entire financial crisis” and the government’s decision “to allow it to fail” as “the watershed decision”.
Not everyone will agree with such assessments. For instance, Mr Blinder characterises the reforms instituted thus far in response to the 2008 crash as “substantial and thorough,” an evaluation that will perplex sceptics across the political spectrum, from those who feel that not enough has been done about too-big-to-fail institutions and dangerous derivatives to those, on the other side, who argue that the overly complex Dodd-Frank legislation will simply suffocate business in red tape without providing any meaningful safeguards against the sort of chaos that occurred.
Mr Blinder, however, always makes it clear when he is offering an opinion, and he provides a logical dissection of his reasoning, pointing out where he thinks legislators punted: “Dodd-Frank made no attempt to fix the nation’s broken mortgage finance system,” he explains. “Nor did it seek a way out of the foreclosure mess.”
Overall, however, Mr Blinder contends that “the grab bag” of policy activism done during the tenures of George W Bush and Barack Obama actually worked.
Why, then, has there been such public anger, and such a “severe antigovernment backlash” by Tea Party protesters, by conservative Republicans, and by financial industry titans who have loudly complained about excessive regulation?
What we’ve got here, Mr Blinder asserts, is a failure to communicate — specifically a failure, in his opinion, on the part of the Obama administration to educate the American public about how we got into the fiscal mess in the first place and how the president’s policies were going to get us out.
“It is a measure of the Obama administration’s ineptitude in communication,” Mr Blinder notes, “that the public came to see Geithner, Summers, & Company as tools of Wall Street while at the same time the bankers who were saved from oblivion came to hate the administration for vilifying and scapegoating them. Acquiring one of those two images was excusable, maybe even unavoidable. Acquiring both at the same time amounted to gross political negligence.”
What of “the spectre of trillion-dollar-plus budget deficits” and the partisan dysfunction in today’s Congress? Mr Blinder says: “America’s budget mess is starting to look Kafkaesque because the outline of a solution is so clear: we need modest fiscal stimulus today coupled with massive deficit reduction for the future. Some of that will take the form of higher taxes — sorry, Republicans. Most of it will be lower spending — sorry, Democrats.” “If you view the world through sufficiently rose-coloured glasses,” he goes on, “you can perhaps see the two parties inching in that direction. But inching’ isn’t good enough. There is plenty of room for partisan bickering over the details, but we need to adopt the Nike solution – Just do it! – as soon as possible.”
©2013 The New York Times News Service
AFTER THE MUSIC STOPPED
The Financial Crisis, the Response,
and the Work Ahead
Alan S Blinder
The Penguin Press; 476 pages; $29.95