David R. Henderson  

Henderson on Blinder in Wall Street Journal

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Alan S. Blinder is one of America's leading economists. One of the few economists who write really well, he is also a master storyteller. In "After the Music Stopped," Mr. Blinder, previously a vice chairman of the Federal Reserve Board and, before that, a member of President Clinton's Council of Economic Advisers, gives his interpretation of the events leading to the U.S. financial crisis, the financial crisis itself, and the Bush and Obama administrations' response. It is one of the best books yet about the financial crisis.

Mr. Blinder, a professor at Princeton and a regular contributor to the Journal's editorial page, tells the story in basically chronological order, gives citations for almost all the important facts he marshals and, refreshingly, tells the reader when he sees himself as making judgment calls in controversial cases. Unfortunately, he also makes judgments on controversial issues that he does not see as (or concede to be) controversial. He also minimizes the role of the government in creating the crisis, omitting important facts that contradict his argument. He describes the financial industry as an example of laissez-faire, though in reality it is highly regulated. The latter claim allows him to blame on the private sector what was really the joint responsibility of a regulated industry and its regulators. Finally, and most strikingly, Mr. Blinder has faith in government's power to make things better despite his own exposition of a series of government actions that he himself admits were mistakes.


These are the opening two paragraphs of my review of Alan Blinder's new book, After the Music Stopped. The book comes out next week. My review was published in this morning's Wall Street Journal.

Another excerpt that distinguishes between Greenspan's and Bernanke's approach to financial crises:

So once the financial crisis happened, what was to be done? Mr. Blinder devotes the bulk of his book to the immediate response to the crisis as well as to ways for avoiding a repeat. He praises the Troubled Asset Relief Program and points out that the net cost of TARP to taxpayers is not the $700 billion that was budgeted for but, rather, a much more modest $32 billion. But there was another way to go, the way Alan Greenspan handled the 1987 stock market crash, the Y2K episode in 1999 and 2000, and the post-9/11 economy. That way was to have the Fed purchase Treasury bills through open-market operations to make sure the economy had ample liquidity. In all three cases, it worked.

Many people think that that's exactly what Federal Reserve Chairman Ben Bernanke did when the crisis hit, but he did not. Mr. Blinder, to his credit, recognizes this, pointing out that, although the Fed changed its composition of assets, it had little effect on the money supply. He makes this point briefly, but in a 2011 article San Jose State University economist Jeffrey R. Hummel provides chapter and verse, noting that Mr. Bernanke took on extensive discretionary power to favor some financial assets over others. As Mr. Hummel puts it, under Mr. Bernanke "central banking has become the new central planning." Mr. Blinder seems to sense this but, unfortunately, does not pursue the point.


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COMMENTS (5 to date)
Bob Murphy writes:

Mr. Blinder, to his credit, recognizes this, pointing out that, although the Fed changed its composition of assets, it had little effect on the money supply.

Hi David,

Can you clarify what you mean in the above? I haven't looked the numbers up yet, but I'm guessing that compared to the '87 crash, Y2K threat, and post-9/11 recession, Bernanke in 2008/09 increased both the monetary base and M1 more than Greenspan did, whether in absolute or percentage terms.

Are you/Blinder disagreeing with that, or just saying Bernanke didn't do as much as the public thinks he did?

David R. Henderson writes:

@Bob Murphy,
You're right on monetary base. See Figure 7 (p. 505) of the Hummel article I cite above. But then read pp. 506 to 509 to see why Hummel says, "Yet it was not all quite as it seemed." The biggest part of the reason: While reserves exploded, in a sense they were no longer reserves because the Fed began to pay interest on them, making them, in essence, loans from the banks to the Fed.

Arthur_500 writes:

As an avowed Keynesian, Mr. Blinder has his own set of blinders. We are supposed to look at facts before making conclusions. Instead, Mr. Blinder (and all too many others) feel it is appropriate to make the facts fit their conclusions. For such a likable individual, Mr.Blinder is infuriating.

Charley Hooper writes:

David,

In your full WSJ article you mentioned three things the government did that helped cause the crisis: Fannie Mae and Freddie Mac, the Community Reinvestment Act, and federal deposit insurance.

You could add to this list: open space set-asides that restricted development, zoning rules, building codes, building permit costs and restrictions, the tax code, and the power given to community groups that pressured banks to further make loans to low-income and poor-credit buyers.

Of course, the effects weren't linear. As housing became a little more expensive every year, speculators and normal people bought more aggressively, bidding up prices and fueling the cycle. Eventually, prices stagnated and some people couldn't pay their mortgages, at which point the speculators jumped out of the market and prices crashed.

Laura curran writes:

Thank you for the review of Blinder's book. It was informative and synthesized many of the events which I remember.

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