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When Dancing Ended, and Disaster Set In

After the Music Stopped, by Alan S. Blinder
By MICHIKO KAKUTANI Published: February 7, 2013

The title of Alan S. Blinders highly readable new book on the financial crisis (yes, a readable book about economics) refers to an infamous remark made in July 2007 by Charles O. Prince III, then the chief executive of Citigroup. When the music stops, in terms of liquidity, he said, things will be complicated. But as long as the music is playing, youve got to get up and dance. Were still dancing.
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Of course, the music did come to an PRINT abrupt stop soon. For the United REPRINTS 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. Blinder, a professor of economics and public affairs at Princeton and a former vice chairman of the Federal Reserve Board, 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.

Princeton Univ ersity

Alan S. Blinder

AFTER THE MUSIC STOPPED

The Financial Crisis, t he Response, and t he Work Ahead By Alan S. Blinder Illustrated. 4 7 6 pages. The Penguin Press. $2 9 .9 5.

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This sorry tale of fiscal irresponsibility and chaos and the 3. Idaho: Film Document of Animal Abuse ways the Bush and Obama administrations grappled with Is Banned the unspooling crises has been told many times before. The economists Nouriel Roubini MORE IN BOOKS (1 OF 47 THE HOME FRONT 4.ARTICLES) (Crisis Economics) and Joseph E. Stiglitz (Freefall) have both written lively, accessible A Nonprofit Lender Rev iv es the Hopes White Lies books addressing the causes and consequences of the cataclysm; David Wessel of The Wall of Subprime Borrowers Read More Street Journal provided an engrossing account of how the Federal Reserve chairman, Ben 5. DEALBOOK S. Bernanke, and President George W. Bushs Treasury secretary, Henry M. Paulson Jr., A House With a Modified Loan Is a Sy mbol of Serv icers' Tug of War With desperately tried to shore up the United States economy as one fiscal domino after another Inv estors was toppling (In Fed We Trust); and an array of journalists including Michael Hirsh,
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After the Music Stopped, by Alan S. Blinder - NYTimes.com

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Noam Scheiber, Ron Suskind and Bob Woodward have written books that look at President Obamas economic team and its handling of the recovery. 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 its 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. Blinders 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 governments decision to allow it to fail as the watershed decision. 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 nations 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 Reserves creation of huge amounts of liquidity, and Congresss 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 weve 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 presidents policies were going to get us out. He suggests that the presidents 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
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After the Music Stopped, by Alan S. Blinder - NYTimes.com

government gave away money to the banks. (It actually made loans and equity investments). It is a measure of the Obama administrations 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 todays Congress? Mr. Blinder says: Americas 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. If you view the world through sufficiently rose-colored glasses, he goes on, you can perhaps see the two parties inching in that direction. But inching isnt good enough. There is plenty of room for partisan bickering over the details, but we need to adopt the Nike solution Just do it! as soon as possible.
A version of this review appears in print on February 8, 2013, on page C30 of the New York edition w ith the headline: When Dancing Ended, and Disaster Set In.
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