After The Music Stopped: The Financial Crisis, the Response, and the Work Ahead, by Alan Blinder, Penguin Press, RRP$29.95, 496 pages
Economists still debate how, why and when the US exited the Great Depression. These arguments go beyond the tweedy. Interpretations of America’s worst financial episode shaped the country’s public policy for the rest of the 20th century. For Keynesians, demand shortfalls required New Deal-like stimulus packages. Monetarists focused on liquidity, urging low interest rates and warning against a “business as usual” Federal Reserve.
Both accounts buried an assumption deep in American grey matter: in a crisis, the danger lies in the government, or at least part of it, doing too little, not too much.
However, the US’s most recent recession may have changed that belief. The word “stimulus” has disappeared from politicians’ speeches. Despite the hopes of many on the left that the breathtaking interventions by the US federal government would renew faith in social democracy, the opposite is equally likely. When the next crisis hits, it is by no means certain the response will be as dramatic.
“The stunning combination of policy success and political failure may be the strangest legacy of the financial crisis, and it carries important lessons for the future”, writes Alan Blinder in After The Music Stopped, his account of the meltdown, the government’s response and the task facing President Barack Obama in his second term.
Blinder’s “second draft of history” takes its title from a famous interview in July 2007 in which Chuck Prince, the then Citigroup chief executive, told the FT that “as long as the music is playing, you’ve got to get up and dance”. The book is a lucid analysis of Treasury Secretary Timothy Geithner’s claim that “we saved the economy, but we kind of lost the public doing it.” Blinder, a Princeton professor and former vice-chairman of the Fed, wants to show that the government response was imperfect but effective – and, therefore, Americans should not see the state as an enemy.
He offers “a comprehensive history of this episode”, noting that “no one else has done that to date”. This is hubristic but Blinder’s book deserves its likely place near the top of reading lists about the crisis. It is the best comprehensive history of the episode.
But is his premise – that the US government isn’t getting the credit it deserves – correct? And if so, what does this mean for the second half of Obama’s presidency?
Blinder begins on solid ground. His cogent explanation of the crisis identifies “seven villains”: “inflated asset prices”, “excessive leverage”, “lax financial regulation”, “disgraceful banking practices”, “the crazy-quilt of unregulated securities and derivatives”, “abysmal” rating agencies and “perverse compensation schemes”.
He leaves room to quibble. Some structural factors, such as global current account imbalances, loose monetary policy and rising inequality, are largely absent from his reasoning. The influence of quixotic economic theories and the corruption of academics receive short shrift. It has a Tolstoyan disregard for individual agency, which will anger those looking to pin the blame. But Occam’s razor must cut eventually.
The author’s hokey style slices through jargon, although his prose is sometimes the literary equivalent of dad dancing at a wedding. (“Archimedes ... famously declared he could move earth with a large enough lever. One worries where he put the fulcrum!”) Overall, though, snappy lines such as “credit is a coward” outnumber the charmingly cringeworthy ones.
Blinder is at his best outlining the government’s response to the crisis. He explains the options that were available to policymakers and critiques their decisions. He does this without forgetting the frenzy – the characters are set in historical context. George W Bush is accused of leaving the scene of a crime by delegating leadership of the response to his economic team. Hank Paulson, the then Treasury secretary, is skewered for his power grabs. Geithner was overly deferential to banker demands but dynamic and decisive. Fed Chairman Ben Bernanke receives mostly praise, for acting when others dawdled.
Overall, it is a riveting tale. The troubled asset relief programme (Tarp) was botched, banker pay remained all but untouched and the extent of the Fed’s programmes was concealed. However, Blinder is right to imply that consistent inaction would have been worse than inconsistent action.
After the white heat cooled, policymakers kept acting. Tarp was expanded, the new administration passed a stimulus bill, the Fed ramped up its unconventional measures, and Obama signed sweeping financial reform into law. Here, Blinder holds policymakers to a higher standard than better-than-nothing. Tarp should have asked for much more from the banks, he says, especially regarding the foreclosure crisis. “It is hard to resist the conclusion we just didn’t try hard enough,” he argues.
Ultimately, though, Blinder says the government got it more right than wrong. Special praise is given to the Fed, which led with bold monetary policy. In this case, it is worth heeding the advice of Adrian Finn, the troubled smart-Alec in Julian Barnes’s The Sense of an Ending: “we need to know the history of the historian”. Blinder was a well-known “dove” when he was at the Fed but his judgment is a fair one. He’s also right to stand up for the much-maligned stimulus plan – it wasn’t perfect but the problem was more with its presentation than with its policies. Only when assessing the Dodd-Frank package of financial reforms, “a pretty good bill”, does he verge on the Panglossian.
Looking ahead to the debates over raising the US debt ceiling and the automatic budget cuts now due to take effect in March, Blinder concludes that “unlike the politics, the economics are not actually that difficult”. He’s right, in a way – if America is to reduce its deficit and its debt, taxes will need to rise and spending on healthcare will need to fall. For Blinder, the problem is not only that Obama faces an obstreperous Congress. It is that the government’s handling of crisis communications left many voters believing the state can never be a force for good.
True, but he’s forgetting something: Obama won the 2012 presidential election. Polling suggests that while the bank bailout remains unpopular, the rescue of the auto industry is widely supported. Most Americans also believe the stimulus helped the economy. As Blinder himself writes, Americans “idolize Jefferson, but we follow Hamilton”. In the next four years, Obama doesn’t have to so much make the case for the state as the case for paying for it.
John McDermott is the FT’s executive comment editor