Cause(s) and Effect(s)
‘After the Music Stopped,’ by Alan S. Blinder
By MATTHEW BISHOP
The New York Times Review of Books, March 1, 2013
AFTER THE MUSIC STOPPED
The Financial Crisis, the Response, and the Work Ahead
By Alan S. Blinder
476 pp. The Penguin Press. $29.95.
On March 12, 1933, shortly after temporarily closing the banks in order to clean them up, Franklin Delano Roosevelt held the first of his presidential “fireside chats” with the American people. He delivered this radio address in the belief that the actions of his government, thus far described only in the jargon of banking and law, “ought to be explained for the benefit of the average citizen.” He had three more chats that year, and two the following year. They played a crucial role in bringing the public with him as his government helped lead the economy out of the Great Depression.
Seventy-five and more years later, after the collapse of Lehman Brothers triggered a financial meltdown and deep recession, successive American administrations learned important lessons from Roosevelt, which helped the United States and the world avoid another Great Depression. However, they failed to learn the importance of communicating clearly with the public about what was happening and what the government was doing about it.
This communications failure is the most telling theme of “After the Music Stopped,” Alan S. Blinder’s terrific book on the crisis of 2008. It is a failure he feels viscerally, judging by the ferocity of his comments, particularly about leading members of the Obama administration, including the president, who “has rarely taken the time to give a speech of explanation — far less time than the American people need and deserve.” (As for his predecessor, Blinder writes, “Can you remember even a single Bush speech on the nation’s developing economic crisis?”) Likewise, the two Treasury secretaries during the crisis, Henry Paulson and Timothy Geithner (a “terrible orator”), between them have “barely given a single coherent speech explaining what happened and — perhaps more important — why they did what they did.” As a result, the policy response to the crisis was “an incoherent blur to most citizens — and not a very successful blur, at that.”
Yet, as Blinder argues persuasively, after the terrible blunder of letting Lehman Brothers collapse, both the Bush and Obama administrations did a decent job of stopping the economy’s fall into depression and helping it gingerly back onto its feet. If the public had only understood this, confidence would have returned sooner, and with it stronger growth, and Obama would not have had such a hellish time getting re-elected.
Although Blinder served on President Bill Clinton’s Council of Economic Advisers, and admits to Democratic leanings, this is not an ideological book. Rather, it is the work of a somewhat frustrated technocrat who has spent his career at the highest tables of academia and policy making, never entirely comfortable because of a tendency to speak his mind. His two-year tenure as vice chairman of the Federal Reserve probably would have been longer but for his habit of challenging the unquestioning cult of Alan Greenspan that had taken hold among Fed staff members under the chairman. (Ben Bernanke, Greenspan’s successor at the Fed, was a longtime and much-admired colleague of Blinder at Princeton; perhaps the weakest aspect of the book is its tendency to give the central bank the benefit of the doubt.) After leaving the Fed in 1996, Blinder gave many speeches warning about the growing bubble in the financial markets, especially in credit, though he is honest enough to acknowledge that he never foresaw the scale of the crisis that was to follow the bursting of that bubble.
Why did the crisis happen? Blinder subscribes to the “perfect storm” theory, in which many unfortunate things occurred simultaneously, producing an outcome far worse than would have resulted from just one or even a few of those things. The culprits ranged from a widespread faith in the academic efficient-market hypothesis to the feeble standards at credit rating agencies, which allowed bundles of subprime mortgages to be treated as “investment grade,” to regulators and policy makers who did not understand the severity of the situation until it was too late. The catastrophic decision to let Lehman Brothers go bust, Blinder argues, was taken in large part because Paulson and Bernanke believed that the markets had used the six months since Bear Stearns was rescued to prepare for Lehman’s failure — though how they came to hold such a naïvely optimistic belief is anyone’s guess. As for the bankers, they exhibited a failure of leadership succinctly reflected in the quotation that inspired the title of Blinder’s book. Charles O. Prince III, then the boss of Citigroup, justified the bank’s lax lending standards by saying: “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
Blinder’s criticism of communications failure rests on his view that the response to the post-Lehman meltdown was far better than the public realizes. He points out that the now notorious Troubled Asset Relief Program, known as TARP, which lent billions to the banks to keep them alive, ultimately generated a profit to the American taxpayer as the banks returned to health and repaid what they owed. The stress tests of the banks in early 2009 also helped restore confidence, and Obama’s fiscal stimulus helped end the recession. (Here, Blinder says, the communications failure began to take its toll, because Obama did not make the case for a big enough stimulus or for a necessary additional stimulus later.) Blinder is also fairly satisfied with the controversial Dodd-Frank Act of 2010 that overhauled American financial regulation — although perhaps his praise is largely a reflection of his low expectations. He does not think Dodd-Frank will make financial crises a thing of the past, and is not even sure it will make them rarer. However, Blinder claims, it should reduce the severity and costs of future financial excesses. Well, let’s hope so.
Yet Blinder does find Washington guilty of one grievous blunder, so big that it almost explains the public’s unhappiness more plausibly than a presidential communications failure. The foreclosure crisis that has caused millions of Americans to lose their homes was unnecessarily painful, he believes. A series of government interventions to help struggling homeowners was consistently too little, too late. In February 2008, he argued for the creation of a large program for refinancing borrowers, along lines similar to the Depression-era Home Owners’ Loan Corporation. Had that been done — and he thinks no one in power was trying hard enough — the United States would now be experiencing “a shortage of housing, rising house prices and a homebuildingboom — which would be helping the economy recover.”
What the economy is now experiencing is a debt crisis, though Blinder explains clearly why this will become really bad only in a decade or so, as health care costs get out of hand. Spending cuts will be essential. Unlike many Democrats, Blinder accepts that “the government can cover no more than a small fraction of the projected deficits by raising taxes.” The sooner America gets control of its government spending, the better, he says. Given a divided Congress and a confused public, making the case for the right fiscal reforms will require a master communicator. Time for Obama to throw a few logs on the White House fire and start talking.
Matthew Bishop is the United States business editor of The Economist and the author of several books on economics.
A version of this review appeared in print on March 3, 2013, on pageBR16 of the Sunday Book Review with the headline: Cause(s) and Effect(s).
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