In After the Music Stopped Alan S. Blinder, a professor of economics and former vice-chairman of the Federal Reserve Board, presents a ‘second draft of history’ in his account of why the financial crisis happened and what followed in its aftermath. Focusing primarily on the causes and consequences of the crisis in the United States, and how the Bush and Obama administrations grappled with the fallout, After the Music Stopped attempts to provide a detailed and informed account of exactly what happened in a way that can be easily understood by readers not familiar with economic policy and the often arcane minutiae of the global financial system. To a large extent, Blinder succeeds in doing this; even though there are points at which the narrative and explanation can be difficult to follow, and the events and details described a bit too esoteric, the book provides an extremely accessible account of the financial crisis and its aftermath.
In recounting the factors that led to the crisis (the first third of the book), Blinder correctly identifies how inflated bond prices and the housing bubble, fuelled by the easy availability of sub-prime mortgages, and coupled with the proliferation of complicated investment vehicles and weak regulatory mechanisms, created a “perfect storm” when house prices collapsed in 2007.
Exposed to the crisis through their investment in mortgage-backed securities, and poorly advised by credit-rating agencies, banks and institutions throughout the financial sector experienced the fallout from the collapse of the housing market with some, like Lehman Brothers, failing altogether, thereby spreading the contagion even further. Finally, the culture of work in the financial sector was also to blame, with perverse incentive structures and compensation schemes playing a significant role in pushing bankers to pursue ever riskier strategies in their attempts to make short-term gains.
The story Blinder tells here is not one that is new; however, the account benefits from being able to take a broader view of the crisis several years after it first began. This becomes more evident in the second-third of the book, where Blinder recounts the US government’s response to the crisis. Here, he emphasises several key points; although the interventions made by the government to respond to, and mitigate the effects of, the crisis were largely correct and necessary, the initial response was tentative and haphazard. More importantly, when the Obama administration came to power and took more stringent measures to address the crisis, Blinder argues that the government failed to effectively communicate its intentions to the American people.
The effect of this, for Blinder, has been clear. As the public has struggled to understand both the causes of the financial crisis, and the government’s response to it, the narrative has become increasingly confused and partisan. For example, Blinder argues that the $700 billion bailout given to banks under the Troubled Asset Relief Program (TARP) comprised loans that would inevitably have to be paid back. However, because of the government’s inability to effectively show what it was attempting to do through measures such as this, it was (and is) widely believed that the government had simply given money away to the banks. Using instances like this, the Tea Party and the more virulently ideological wing of the Republican Party have been able to muddy the waters, claiming that government intervention has exacerbated the crisis, even as it remains clear that the long-term solution to America’s economic woes will inevitably require the government to play a greater role in regulating the economy.
As a Keynesian, Blinder generally agrees with the stimulus spending and bank bailouts that characterised the Obama administration’s response to the crisis. Indeed, in the final third of the book, Blinder lays out advice for policymakers, essentially arguing for continued stimulus spending, and for measures to be taken to address the regulatory lapses that made the crisis possible in the first place.
Wading in on the debate on government deficits, Blinder also agrees that the long-term health of the US economy will require deficit reduction at some point in time. However, while all of this is perfectly sound and reasonable advice, it is possible to get the impression that Blinder does not go far enough in his criticism of the factors at the level of the state that led to the crisis in the first place. For example, many would argue that even though the Obama administration’s response to the crisis was a welcome step in the right direction, it was woefully inadequate when it came to the question of imposing new regulations on the financial sector in the aftermath of the crisis. Similarly, while Blinder does point out how the Federal Reserve and the Treasury presided over a period of unprecedented deregulation in the 1990s and early 2000s, he reserves much of his ire for the private sector and their behaviour in the run-up to the crisis even though one could make the argument that the latter could not have existed without the former. Indeed, this is essentially what has been argued by non-economists like David Harvey, Greta Krippnar, and Monica Prasad who have shown the ideological underpinnings of the shift towards neo-liberalism and deregulation in the 1980s and 1990s, and the way in which this influenced policy-makers in this period. Following this narrative, the state was complicit in fuelling the crisis in that it actively sought to generate economic growth through the same risky, short-term pursuit of profit that drove the financial sector to the brink of disaster.
After the Music Stopped is an excellent account of the financial crisis and its aftermath. Blinder has done a great job of breaking down an extremely complex set of events and explaining them in a way that is both accessible and eminently readable. His understanding of the causes of the crisis is fundamentally correct, as are his policy prescriptions for the future. It would have been interesting to see a more penetrating critique of the role of the state and capitalism as part of the analysis but despite that the book is highly recommended for any who have an interest in understanding perhaps the most significant economic event of the recent past.
The reviewer teaches Political Science at the Lahore University of Management Sciences
After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead (Economics) By Alan S. Blinder Penguin Books, US ISBN 978-1-59420-530-9 476pp.