BOOKS JANUARY 24, 2013
After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead
by Alan S. Blinder
Penguin, 476 pp., $29.95
Say this for Alan S. Blinder: the man has not been jaded. His new book on the Wall Street meltdown, After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead, is animated by a lay person’s sense of wonder and—at times—horror at the country’s financial mess.
A vice-chairman of the Federal Reserve Board in the mid-’90s and an economics professor at Princeton, Blinder is an expert’s expert and a policy wonk, and his incredulity about our current economic plight is well in view. He is shocked that unemployment in prosperous America rose to, and persisted at, a level unseen in a generation. He is amazed that millions of Americans lost their homes to foreclosure. He is staggered by the scale of government efforts to save Wall Street and to right the economy. Perhaps most of all, Blinder is amazed that Americans turned on their government after it repaired the mess that, for the most part, the private sector created. He does not understand why the Troubled Asset Relief Program (TARP) has such a bad reputation, since it basically worked. He is puzzled by the ill-regard with which Americans hold the Fed—after all, its liberal monetary policy saved the economy from a possible depression.
Even now, four-plus years later, Blinder believes that many Americans do not understand why the crisis happened or what the government did to mitigate its effects. People think TARP and the Fed gave away money, when in fact, for the most part, they lent it. They criticize the Fed for “printing money”—which, actually, is part of its job (a detail that escaped, among others, Sarah Palin). This confusion, he says, is his main reason for writing on a subject that has already been fodder for countless journalists (including me), as well as economists and a smattering of politicians. Blinder’s greatest contribution to this literature is probably his stubborn insistence that stemming the panic should have been (and mostly, was) the singular priority of regulators. In this he is absolutely right. Washington “needed to save the sinking ship,” as Blinder says, no matter the widespread ideological bias against government action.
Blinder recognizes that the number one source for most Americans’ resentment about the meltdown and the government’s response to it was, indeed, the government bailouts. Nobody loves bailouts, and neither does he. But his argument in this sprawling overview—at times by inference, at times explicit—is that the contagion of dysfunctional markets and economic collapse was far worse than the various cures administered by Washington. Indeed, to Blinder, the government’s failure to save Lehman Brothers was a tragic missed opportunity to prevent the crisis from worsening. (My own take is different: by the time Lehman failed in September 2008, banks were stuffed with so many bad mortgages that the economy was headed for the soup regardless.) Continuing in that vein, Blinder thinks it was right to rescue A.I.G., even if that also entailed rescuing its creditors; wrong not to help the creditors of the failed Washington Mutual; and wrong not to do more for victims of foreclosure. In short, when a bailout happened, Blinder applauds; when it didn’t he is churlish.
An inveterate pragmatist, Blinder gives no succor to the anti-bailout (and anti-government) critics on the right, and he is similarly unmoved by the demon-seers on the left. Though a liberal Democrat (at least by Fed standards), he discards any number of radical fixes that have, as their loci, a desire to punish Wall Street. Limiting bankers’ pay, he says, is not a job for government. The Paul Volcker–inspired ban on proprietary trading, Blinder cheekily observes, has a definitional problem. Prop trading (i.e., trading done by banks for their own accounts rather than for clients) “often fails the Potter Stewart test: You don’t know it when you see it.” He is similarly dismissive of the idea of splitting up the financial giants “Simple right?” Blinder asks rhetorically. “Actually…it’s not.”Unlike many who write about Wall Street, Blinder does not retreat from his subject’s complexity; he is willing to see both sides of an issue, to admit that solutions may be obscure or, for the moment, unavailable. (That corporate clients pay rating agencies to issue opinions is corrupting, but Blinder cannot think of a better system.) An exception to his generally supportive stance toward regulators, concerns foreclosure; Blinder sorely laments that neither the Bush nor the Obama administrations did more to help people stay in their homes, especially since they did so much for banks. (Regulators, not unreasonably, were worried about how to identify just which homeowners needed help with their mortgages and also wouldn’t be likely to default if they did get help.) This is a controversial issue, but Blinder understates the degree of bad faith by both mortgage borrowers and lenders. He notes that banks issued “liar loans” but neglects to say that the ordinary people who got such loans committed fraud. By including, as his only real-life example, two Mexican-American strawberry pickers who were “egged on” by a real estate agent into an untenable mortgage, Blinder downplays the degree of borrower culpability. At the other end of fortune’s ladder, Blinder devotes almost no attention to Angelo Mozilo, the deposed head of Countrywide Financial, or to similar mortgage kingpins. While Blinder mentions the excessive largesse with which such lenders provided credit, his treatment of this phenomenon is generic and colorless. Since he does not show us actual bankers, we have less feeling for what was happening at street-level, where firms like Countrywide were shoveling loans at the public irrespective of their ability to afford them—confident they could dump such loans on investors before the “music” stopped.
Nor does Blinder share much of his own experience—and it’s a shame. After faulting Team Obama for making a forecast on unemployment that turned out to be way too optimistic (an error the Republicans would use, ad nauseam, to lambast Obama) Blinder recalls that, when serving as an economic adviser to President Clinton, his group had made a forecast that was terrible. But it was terrible because it undershot future economic performance. No one, of course, protested. Would that Blinder had shared more such gems.
His use of gray-shaded explanatory boxes and of illustrative but fictitious bank balance sheets suggests, however, that he has the textbook market in mind. His writing is witty and accessible and never boring, but it can be academic. His stylistic tic is to pose a problem, or recommend a solution, and follow with, “There are (pick a number) reasons for this.” Even for writing this book (three reasons). As the reasons pile up, the reader starts to hope that class will be dismissed, especially since After the Music Stopped goes on for too long, delving into the Greek debt default and even the recent U.S. budget deficit battles on the Hill.
Not surprisingly, Blinder is at his best writing of the Fed (his former employer). Perhaps because he understands what the Fed was up against, he is more than sympathetic to the tasks facing Ben Bernanke, the Fed chairman (by contrast, he is unduly rough on the former Treasury Secretary Hank Paulson). Unlike some crisis authors, Blinder has a regulator’s sense of what makes these and various other government agencies tick—each with their unique institutional potentials and constraints. He also understands the private sector systems that paved the way to the housing bubble. Blinder, in fact, has written a history of institutional failure, and institutions generally are not all good or bad, nor do they turn on a dime. For a reader wondering how we got here, and why the people in charge have seemed, often, to be so chary of stringing up the culprits, or tearing down the system, Blinder’s book—not least because his fair-minded approach and pragmatic mindset evokes that of America’s current regulators—gives us an invaluable insight.
Roger Lowenstein is author of The End of Wall Street. He is writing a book on the origins of the Federal Reserve.