Alan Blinder on Financial Crisis, the Response, and the Work Ahead

Thursday, January 31, 2013

Alan Blinder, Princeton professor, Wall Street Journal columnist, and former vice chairman of the Federal Reserve Board, explains how the worst economic crisis in postwar American history happened, what the government did to address it, and what is still left to do. In After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead Blinder argues that the U.S. financial system became too complex and too unregulated, which created a perfect storm beginning in 2007. He makes the case for government intervention and explains how it prevented a total financial meltdown.


Alan Blinder

Comments [27]

Peter Talbot from Harrison, NJ

Blinder is a far better thinker than Krugman, but only further clouds mens minds with incorrect assumptions.

His factoid that 15% of American purchase is of domestic goods is totally wrong. Take out services, housing and food and it's the other way around: 85% or more is overseas manufactured and/or assembled. This tired old saw deserves burial. Products with residual value are no longer produced here without subsidy or egregious government overpayment by the DOD.

His opinion about the relatively minor role of repeal of Glass Steagal is mistaken. The head of Chemical Bank's Latin American desk in 1984 told me personally that repeal would be huge mistake: that it was only the forced "double breasting" required by that law kept the major banks' corner offices from securitizing elephant dung by the minute to improve quarterly earnings. Blinder is right only in that the banks were already colluding to evade the law, but totally wrong regarding the result of repeal. Repeal encouraged the three-piece baboons to riot.

His list of culprits for the meltdown is correct, but there is a hierarchy here and his list avoids the real truth: that one party is much more guilty than others. The bad mortgages were just that: about 250 billion in bad paper. It was the endless hypothecation and resale of tranches of that bad paper in bank created Credit Default Swaps/Obligations sold to sovereign, pension and other major investment funds globally that swelled this actual loss to tens of trillions in potential loss. And it was the institutionally corrupt rating agencies that allowed these deals to work by removing fiduciary risk from buying the securities created, based on their understanding (and the banks' conviction)that due to AIG, these mortgages were written like US currency: based on the full faith of the US government. Unless I mistook my grade school lessons in civics, private printing of paper that portends to be US currency is counterfeiting punishable by confiscation, abrogation of transactions and lengthy jail time. But that would mean that the US would have to make good on all the bad paper we had allowed our banks to peddle overseas, and THAT was the reason for TARP, not rescue of Citi or Ditech or any other domestic concern. Paulsen knew that the US dollar was toast unless the US government adopted the bad paper (not the mortgages: the CDS/CDO mountain) of the investment banks and continued to pour newly "printed" electronic money down the drain until our sovereign fund and international "friends" could get their money out at 100 cents on the dollar!!!!

So let's stop kidding here, OK? The banks, and specifically Goldman, JP, Wells Fargo, Citi, Lehman, Chase destroyed more American wealth in the name of chimerical short term profits than the Axis powers destroyed in WWII. Again I say: glad my kids avoided Princeton. This isn't Keynes that Blinder's evasions are defending, it's Malthus.

Jan. 31 2013 01:59 PM

When people get a loan to buy a home, they only ask the following: (1) how much can I borrow and (2) how much will it cost me every month. At the beginning of the housing bubble, Greenspan slashed interest rates and congress eliminating banking restrictions on issuing mortgages (formerly people could only borrow 3x gross, and a maximum of 80% of the purchase price). The intended result was to create a housing bubble.

A house with a fair market value (fmv) of $250,000 would have required a buyer to put down $50,000 (20% of the purchase price); the buyer could only have borrowed $200,000 (80% of the sales price); and the buyer could only have borrowed $200,000 if they earned $66,000/year (maximum loan 3x gross). The monthly mortgage payment would have been about $1200 (interest at 6%, about $600 per $100,000 loan).

Once the rules were changed and interest rates hacked, the price of housing blew up because people could borrow a whole lot more. The house that sold a few years before for $250,000 blew up to $750,000. Buyers could borrow $750,000 because there were no restrictions on the amount of the loan based on income, which in any event did not have to be verified. No down payment. Teaster intro rates of 1.5% meant the buyers would pay less than the $1200/month.

The lenders knew these people could not afford the loans, and it was only a question of time before they defaulted. The borrowers usually did not understand. Wall Street knew the loans were bad, so when they bought the loans from the bankers they mushed them together so that people purchased a fraction of many different loans, and it was impossible for buyers to investigate the underlying loans. The banks and Wall Street knew the truth, and few other people did. Unfortunately, the politicians refused to indict and prosecute the people who were responsible, seize their assets, throw the banks into bankruptcy, and seek justice for the rest of us.

With our actual unemployment and reduced wages, most Americans can no longer afford to buy a house, and many owners are still underwater.

The government is spending $40-$50 billion a month buying bad mortgages from the banks to force the citizens to take the loss for the reckless behavior of the banks. Major hedge funds are buying up bundles of foreclosed properties around the country and using them as rental properties. This isn't a housing recovery -- it's a housing disaster, and it's far from being over.

Jan. 31 2013 12:58 PM
Hank Fandel

Question: Is our current interpretation and implementation of Capitalist Philosophy fatally flawed?
In that... Our economy is the circular flow of capital, labor, supply, and demand. The firms are supposed to depend on households for capital, labor, and demand while the households depend on the firms for jobs and goods and services. YET... our firms are mandated to concentrate wealth above all else and in that interest, to be as efficient as possible, and in the interest of efficiency, to reduce or eliminate labor as much as possible. (These are not far-flung ideals in that the top twenty percent of the country possesses ninety-three percent of the financial wealth and the real wages of the bottom eighty percent have not gone up in thirty years.) SO... If the economy is the circular flow of capital, labor, supply and demand yet the firms strive to concentrate wealth (removing the wealth from the hands of the households)and reduce or eliminate labor costs (again constricting the buying power of households), is there not a point of diminishing returns? Who then will provide demand for the goods and services?
{What appears to result is a dual economy where 20% flourish amidst the circular flow (like the free flow of blood to biology) while 80% stagnate or survive on credit (like biology below a tourniquet).}

Jan. 31 2013 12:53 PM
Emmanuel Jamali from Hastings

If we had total government control of banking, we would not have all these crises. It's time people realize that cultural obsession with money is insane.

Jan. 31 2013 12:42 PM
Sheldon from brooklyn

Amen Fuva. Goldman was a HUGE counter-party to AIG.

Jan. 31 2013 12:40 PM
Noach from Brooklyn

1.) Regarding bailouts: Please address the hypocrisy of those who support them while extolling the virtues of the "free market"/laissez faire capitalism and decrying "big government", etc.

2.) Please address the epidemic of foreclosures, the legality of many of which has been challenged.

Should banks be allowed to throw people out of their homes who have nowhere else to go? Families, children, veterans, disabled, etc., thrown out on the street?

Jan. 31 2013 12:40 PM
Tom from Brooklyn

Made our money back? I was all for the bailouts but if we used S&P 500 as benchmark (from late 2008 / early 2009) for AIG and the like, wouldn't we find that the money would have been better invested in the stock market (up 120% from March 2009)?

Jan. 31 2013 12:40 PM

Blinder lives up to his name...

Very slick...

Don't get blinded by a blinder!

Jan. 31 2013 12:38 PM

The reason that there have been so few prosecutions in the financial industry is that our culture LOVES to pick on the poor and weak and LOVES to idolized the rich and mighty.

Basically, we are chickens and peck according to "pecking order."

Jan. 31 2013 12:36 PM
fuva from harlemworld

Well, Goldman Sachs "didn't need" that money because they had already gotten their subsidy in the AIG scam...Please. This Blinder guest reminds me of that Canard guest.

Jan. 31 2013 12:34 PM
Bob from Westchester

While I agree with most of what Professor Blinder on the financial crisis, I think his comparison of the rating agencies to universities was a little too holier-than-thou. As a parent of 2 college students, I can assure him that the students are paying professors for their grades at huge costs -- and the grade inflation over the past years demonstrates that the universities and their faculties are very aware of this fact.

Jan. 31 2013 12:34 PM

Rating agencies fraudulently gave AAA rating to financial instruments that later failed. The agencies claimed that it was their "opinion" and they excercized their freedom of speech. Blinder repeats it.

Jan. 31 2013 12:33 PM

A corporate lawyer friend who worked for a top firm tells me he knew it was all an illusion when he securitized second mortgages on mobile homes for a large European bank and most of the resulting financial instruments were rated AAA, roughly the equivalent of Swiss government bonds.

Jan. 31 2013 12:31 PM
Noach from Brooklyn

What's the difference between Wall Street and the Vegas strip?

(I have an answer but I'll wait and see what others answer.)

Jan. 31 2013 12:30 PM
Sheldon from Brooklyn

Ratings agencies were the WEAK link, they weren't culpable? What is this guy smoking. If they had done their jobs, there would not be a crisis.

Jan. 31 2013 12:29 PM
Noach from Brooklyn

Adding to Fuva's post:

Hasn't it also been proven that the banks actively _lured_ people into taking-out mortgages and loans _knowing_ they wouldn't be unable to pay them back?

Isn't that _predation_?

@antonio from Bayside:

Glad you appreciate my posts.

Jan. 31 2013 12:25 PM
tom from astoria

If a patient has underlying weaknesses, the doctor understands that there is a ceiling on recovery. During the crisis, as today, something fundamental is lacking: hundreds of millions of manufacturing jobs that have been moved elsewhere. WHy don't economists discuss this? Regular Americans talk about it all the time.

Jan. 31 2013 12:24 PM
John from NYC

Does your guest have an opinion on the documentary film - "Inside Job" which is about the Financial crisis?

Jan. 31 2013 12:23 PM
Sheldon from Brooklyn

If a bank wants to loan someone %100 percent of a loan to value of a house or to people without proof of income or net worth, or to meth addicts, it should be their right.

As long as those loans are CORRECTLY LABELED as junk, when they are re-packaged and re-sold.

Jan. 31 2013 12:21 PM
antonio from baySide

why not revive the glass steagall act???

Jan. 31 2013 12:20 PM
Amy from Manhattan

I can't help noticing that not only did Mr. Blinder's list of what caused the collapse put borrowers who took loans they couldn't afford before banks that made those loans, but he didn't mention that many lenders actively encouraged or even pushed borrowers to take those loans.

Jan. 31 2013 12:16 PM
Noach from Brooklyn

1.) Please address the fact that not one of the "bankster" thugs who is responsible for the financial collapse has been brought to justice.

2.) But they threw the book at Madoff.

Why the discrepancy?

Could it be because most of Madoff's victims were wealthy and privileged themselves?

3.) Perhaps Mr. Blinder could comment on two topical works:
-'The Great American Stickup' by Robert Scheer
- "With Liberty and Justice for Some" by Glenn Greenwald

Jan. 31 2013 12:13 PM
fuva from harlemworld

What he attributes to risk seems to really be about complexity, which obscures risk.
And is he equally blaming bankers, regulators and borrowers, many of whom are financially illiterate? If so, how can he?

Jan. 31 2013 12:13 PM
antonio from bayside

Question: Why ARE economists like Dean Baker, Doug Henwood or Richard Wolff shunned?
I like there perspectives...

Jan. 31 2013 12:09 PM
antonio from baySide

Amen Noach. Funny, I remember posing a question (something I heard on Richard Wolf's show on WBAI) to one of Leonard's more mainstream economists...and mentioning I heard it from Professor Wolf. Anyway, I felt I got the "that sounds like tin-foil hat talk" response in way...
But I have to say Leonard pushed back....

Jan. 31 2013 11:52 AM
Noach (anti-bankster/corporate, pro-99%) from Brooklyn

Shall we start betting on just how soft Mr. Lopate will be with this guest?

If numerous past interviews I've heard are any indication, I'm bracing myself...

Jan. 31 2013 10:44 AM
Noach (Independent Traditionalist) from Brooklyn

Has anyone like Dean Baker, Doug Henwood or Richard Wolff ever been on the show? (Or any WNYC show, for that matter)

Seems like you only have establishment figures on economics.

Jan. 31 2013 10:37 AM

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