NY TIMES MICHIKO KAKUTANI
For the United States 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. Alan Blinder, a professor of economics and public affairs at Princeton and a former vice chairman of the Federal Reserve Board, in his new book, AFTER THE MUSIC STOPPED The Financial Crisis, the Response, and the Work Ahead, reminds us that the disaster was years in the making. Starting in the late 1990s and continuing through 2007, he writes, Americans had “built a fragile house of financial cards” that was just waiting to be toppled: “The intricate but precarious construction was based on asset-price bubbles, exaggerated by irresponsible leverage, encouraged by crazy compensation schemes and excessive complexity, and aided and abetted by embarrassingly bad underwriting standards, dismal performances by the statistical rating agencies and lax financial regulation.”
This sorry tale of fiscal irresponsibility and chaos — and the ways the Bush and Obama administrations grappled with the unspooling crises — has been told many times before. The economists Nouriel Roubini (“Crisis Economics”) and Joseph E. Stiglitz (“Freefall”) have both written lively, accessible books addressing the causes and consequences of the cataclysm; David Wessel of The Wall Street Journal provided an engrossing account of how the Federal Reserve chairman, Ben S. Bernanke, and President George W. Bush’s Treasury secretary, Henry M. Paulson Jr., desperately tried to shore up the United States economy as one fiscal domino after another was toppling (“In Fed We Trust”); and an array of journalists including Michael Hirsh, Noam Scheiber, Ron Suskind and Bob Woodward have written books that look at President Obama’s economic team and its handling of the recovery.
US Treasury Secretary Timothy Geithner, left, and Ben Bernanke, chairman of the Federal Reserve
Mr. Blinder draws on the work of many of these reporters in his account. But 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 — gifts that sometimes approach those of Bill Clinton, when it comes to making complicated economic issues and policies understandable to the lay reader.
Direct and concise, 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 Sept. 15, 2008, the “watershed event of the entire financial crisis” and the government’s decision “to allow it to fail” as “the watershed decision.”
Pres. Barack Obama, Sen. Christopher Dodd (D-Conn) and Rep. Barney Frank (D-Mass)
Not everyone will agree with such assessments. For instance, Mr. Blinder characterizes the reforms instituted thus far in response to the 2008 crash as “substantial and thorough,” an evaluation that will perplex skeptics 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 usually provides a logical dissection of his reasoning, carefully 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.” He adds that it also failed to specify how ratings agencies should be paid. (In what has been a major conflict of interest, they are paid by the issuers of the very securities they evaluate.)
Over all, however, Mr. Blinder contends that “the grab bag” of policy activism done during the tenures of George W. Bush and Barack Obama — including the Federal Reserve’s creation of huge amounts of liquidity, and Congress’s expansion of the social safety net and passage of large-scale fiscal stimulus programs — actually worked: “not perfectly, of course. But for the most part, the financial system healed faster than most observers expected.”
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.
He suggests that the president’s reluctance to focus “like a laser beam on the economy” — and his decision instead to take on health care reform too — resulted in “a scattershot approach” to policy that left people confused about his priorities and unconvinced that “things would have been much worse without the stimulus” and other rescue plans. Mr. Blinder contends that the public still believes what he calls “the false notion that the government gave away money to the banks. (It actually made loans and equity investments).”
“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 specter 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.”