Blinder Supports Bailouts, Thanks Pal Bernanke: Review

Do we really need another book about the financial crisis?

The economist Alan S. Blinder certainly thinks so. In “After the Music Stopped: The Financial Crisis, the Response and the Work Ahead,” he says “the American people still don’t quite know what hit them.”

Part of the problem, as he sees it, is that the Obama administration has done such a terrible job explaining things to the voters. He’s right about that, and he proves adept at doing the explaining himself, making accessible the complex events leading to the crisis and the ways in which policy makers responded.

A former economic adviser in the Clinton administration and ex-vice chairman of the Federal Reserve, Blinder is especially good at providing political context. Unlike some post-crash commentators, he doesn’t unburden himself of utopian proposals that have no more chance of adoption than Greece has of paying off its debts.

If anything, Blinder is all too conscious of how Washington works, and this is one of the most dispiriting aspects of the book.

Do we really need both a Securities and Exchange Commission and a Commodity Futures Trading Commission? Blinder doesn’t think so, and he has a theory as to why they both live on:

“If you have multiple regulators, you need multiple congressional oversight committees, each of which is a gold mine for political contributions.”

Uncle Sam

Given his understanding of the dismal realities in the nation’s capital, Blinder thinks Uncle Sam did surprisingly well in coping with the crisis, and his book is an extended -- and reasonably persuasive -- apologia for the bailouts, the Fed’s unprecedented interventions and even the Dodd-Frank reforms aimed at making a replay of the crisis less likely.

Yet at times the author is too circumspect. He seems to think letting Lehman Brothers fail in disorderly fashion was a terrible idea, but he never really comes out and says so. He cites inadequate regulation as a factor leading to the crisis, but lets Fed Chairman Ben Bernanke (a member of the Fed’s Board of Governors from 2002 to 2005) off easy in this connection.

Indeed, the book must be read in the context of Blinder’s longstanding friendship with Bernanke, his former Princeton University colleague, who is thanked in the preface.

Critics of the status quo will find little to feast on in such fare. Blinder doubts, for example, that we can effectively limit bank size in a competitive environment, as opponents of too-big-to-fail have demanded.

Volcker Rule

He has little faith in the new Volcker rule, a feature of the Dodd-Frank reforms that bars federally insured banks from trading for their own accounts -- and in doing so tries to ban behavior Blinder says had little or no role in the crisis.

“If proprietary trading is chased out of heavily supervised commercial banks,” he wonders, “where will it go? To less-well-supervised investment banks? To totally unsupervised hedge funds? Would that make the financial system safer?”

On the other hand, it takes courage to defend government actions -- such as bank bailouts -- that are so deeply unpopular across the political spectrum. Blinder correctly emphasizes how little time or precedent policymakers had, how dire the consequences of even a single systemically important collapse (Lehman) had been, and how cost-effective Fed and Treasury actions proved ultimately to be.

Abject Panic

Memories are short, he reminds us, which is why it’s important to recall the abject panic of 2008. In Blinder’s view there’s little doubt that if Washington hadn’t propped up financial institutions, ended the run on money-market funds and pumped money into the economy to prevent even more joblessness, the dismal recession would have been much, much worse.

There isn’t much that’s new here for crisis sophisticates, except perhaps Blinder’s emphasis on the bond bubble that predated the crash and a vivid chart showing that, adjusted for inflation, home prices today are about the same as they were in 1890. His list of villains -- excessive leverage, appalling banking practices, inept rating agencies and so forth -- is otherwise familiar.

Lay readers, for their part, will wish the book were shorter, and will occasionally be flummoxed by the references to balance sheets and the like. They will also be depressed by the portrayal of a national government heavily influenced by lobbyists and unable to effectively address the tangled foreclosure mess.

Fortunately, that’s not the whole story, for every reader should come away with a sense of optimism as well. Blinder makes a good case that, in the face of catastrophe, public officials acted boldly, creatively and effectively.

The tragedy is that people don’t seem to get that. This book is likely to help.

“After the Music Stopped” is published by Penguin Press (400 pages, $29.95). To buy this book in North America, click here.

(Daniel Akst writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)

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