With bracing clarity, Blinder shows us how the U.S. financial system, which had grown far too complex for its own good and far too unregulated for the public good, experienced a perfect storm beginning in 2007. When America’s financial structure crumbled, the damage proved to be not only deep, but wide. It took the crisis for the world to discover, to its horror, just how truly interconnected-and fragile-the global financial system is.
We still haven’t recovered from the recent financial crisis and subsequent Great Recession. Numerous books have been written about these events. Why another one? Blinder brings both great credibility (Princeton Professor of Economics, former Vice-Chairman of the Federal Reserve Board) and a new focus on the ‘why’ rather than the ‘what’ of the crisis and response. His intent is to provide the ‘big picture,’ instead of detailing who said what to whom when.
Blinder’s ‘supershort version’ is that the U.S. financial system had grown far too complex and fragile for its own good, and had far too little regulation for the public good. It then experienced a perfect storm during 2007-09 that started with the bursting of the housing bubble, then followed by a ‘bond bubble’ implosion that was probably more devastating. The stock market also collapsed, turning many 401(k)s into ‘201(k)s.’
Blinder tells us that all modern economies rely on credit-granting mechanism to nourish the rest of the system, the U.S. more than most. What had been far too much credit turned into vastly too little. Congress then expanded the social safety net and enacted large-scale fiscal stimulus programs, the Federal Reserve dropped interest rates to the floor, created incredible amounts of liquidity, and took over AIG insurance. The result, per Blinder, was a modestly happy ending; however, he gives our macroeconomic performance post-Fall 2008 an F.
Why? Total jobs losses were just under 8.8 million, over a period during which we should have added about 3.1 million more, created a cumulative job deficit of about 12 million by 2/2010. Then the job deficit rose even higher in 2010-11 as job creation fell short of the 125,000/month required to keep up with population growth. By 8/2012 total employment was only back to 4/2005 levels – zero net growth over a period exceeding seven years.
In an average month during 1948-2007, less than 13% of the unemployed were jobless for over 6 months; by 4/2010, it was over 45%, and only slightly less today. Read GDP decline in 5 of the 6 quarters of 2008 and the first half of 2009 – the worst performance since the 1930s.
Blinder does not believe the housing boom/bust was a major factor in our poor recent economic performance. Residential construction normally comprises about 4% of GDP (4.5% in 2000), hit 6.3% in 2005:4, then started falling. Spread over the five years, this ‘boom’ added just 0.3% to the overall GDP growth rate. Home prices peaked in 2006 or 2007, depending on the measure used. Spending on new homes then fell to less than half this peak. Two or three years passed between the start of the decline in housing construction and the serious decline in the overall economy. During 2006-07 real GDP rose at a 2.3% annual rate and unemployment barely budged. Instead, Lehman Brothers’ failure on 9/15/2008 kicked off the crisis.
Seven key weaknesses predated and contributed greatly to the ensuring financial mess. 1) Inflated asset prices, especially housing. 2) Excessive leverage. 3) Lax financial regulation – both in terms of what the law didn’t regulate (eg. no one was responsible for the national mortgage market or protecting gullible consumers) and how poorly regulators performed their duties. 4) Disgraceful banking practices in mortgage lending. 5) Crazy unregulated securities and derivatives built on those bad mortgages. 6) Abysmal performance of statistical rating agencies. 7) Perverse compensation systems that created incentives to go for broke. Summarising – errors and frauds by private companies and individuals, combined by government’s hands-off policy that limited aid to corporations did us all in. A backlash against TARP’s overgenerous bailouts and failure to prosecute corporate leaders was then directed against government activism, Obama, Congress – especially Democrats, Keynesian economics, and the Federal Reserve.
Blinder offers clear-eyed answers to the questions still before us, even if some of the choices ahead are as divisive as they are unavoidable. After the Music Stopped is an essential history that we cannot afford to forget, because one thing history teaches is that it will happen here again.
| Title | After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead |
| Author | Alan S. Blinder |
| first published | January 24th 2013 |
| Publisher | Penguin Press |
| ISBN | 1594205302 |
| Language | English |
