Unfortunately for him, he is a bit late to the game. My shelves already groan under the weight of fine books by journalists and other economists, along with the memoirs of key policymakers that are beginning to roll off the presses. Blinder, as he readily acknowledges, relies heavily on those who published before him. While “After the Music Stopped” serves a useful purpose of synthesizing that earlier reporting into an accessible narrative, he doesn’t break much new ground. (The title is taken from the infamous quote of Citigroup Chairman Chuck Prince, who, when asked in July 2007 why his bank was continuing to lend into a bubble he knew would burst, explained that “as long as the music is playing, you’ve got to get up and dance.”)
Blinder takes it as his mission to disabuse readers of some of the popular myths about the financial crisis: that it was about only subprime mortgages, that it was caused primarily by the Federal Reserve’s loose money policies and the greedy folly at Fannie Mae and Freddie Mac, that it wouldn’t have happened if the Depression-era Glass-Steagall Act had been left in place. He painstakingly demolishes the notion that taxpayers lost hundreds of billions of dollars through bailouts and exposes the Republican lie that stimulus funds did nothing for the economy.
Blinder’s strength is in his patient and clear explication. His explanation of the extreme leverage — borrowing — inherent in most derivatives is the best I have seen. He deftly explains naked credit default swaps — the financial equivalent of fire insurance taken out by hundreds of people on a house they did not own but suspected might burn — and shows how they turned problem loans into a financial-system disaster. He uses simple charts and graphs to show that much of the money “printed” by the Fed over the past few years as part of its “quantitative easing” has wound up back at the Fed in the form of excess bank reserves that banks were unable or unwilling to lend out. He even succeeds in explaining why George W. Bush Treasury Secretary Hank Paulson was right when he wanted to use government money to buy up troubled assets from banks — the original purpose of the much-maligned Troubled Assets Relief Program — rather than provide banks with new capital (Blinder and I may be the last two people on the planet who still believe this).
“After the Music Stopped” has three central points.
Point one: that the financial crisis was the result of too much leverage, too much complexity and too much Wall Street compensation, tragically combined with way too little regulation.
Point two: that the extraordinary steps taken by the Fed and the Treasury were remarkably effective, in terms of their speed and cost, in stemming the crisis and preventing another Great Depression.