When President Obama took office in 2009, he was faced with the worst economic crisis since the Great Depression. The president, his economic team and the Federal Reserve took actions that many credit with helping stave off a global financial meltdown. But the causes of the near-collapse and what was done to solve it remain poorly understood by many who lived through it. In a new book, a leading U.S. economist explains what happened and why. And he warns that more needs to be done to reduce the chance of a similar crisis in the future.


  • Alan S. Blinder Professor of economics and public affairs at Princeton University; former vice chairman of the Federal Reserve Board.

Read An Excerpt

Excerpt from “After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead” by Alan Blinder. Copyright 2013 by Alan Blinder. Reprinted here by permission of Penguin Press. All rights reserved.


  • 11:06:53

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The worst case scenarios imagined during the recent global financial crisis did not occur. In a new book, economist and former Fed official Alan Blinder explains why. He credits actions taken by the Obama administration, Fed officials and others, but he faults President Obama for not better selling his remedies to the public. And he faults Republicans for obstructionist behavior in the middle of the crisis.

  • 11:07:30

    MS. DIANE REHMHis new book is titled "After the Stopped: The Financial Crisis, the Response, and the Work Ahead." Alan Blinder joins me in the studio. You are welcome to be part of the program. Call us on 800-433-8850. Send us your email to drshow@wamu.org. Follow us on Facebook or send us a tweet. Good morning. It's good to see you.

  • 11:08:00

    MR. ALAN BLINDERWell, it's great to be here. Thank you, Diane.

  • 11:08:02

    REHMAnd thanks for being here. You say that most of us still really don't understand what happened.

  • 11:08:12

    BLINDERI think that's right. There are many reasons for that. One is it's just a big complicated mess. And a number of people know little pieces of it. Some are just baffled by the whole thing. And there's been a tremendous amount of disinformation circulated, some accidental, but a lot of it deliberate.

  • 11:08:29

    REHMSuch as?

  • 11:08:30

    BLINDERWell, such as a great example is that the stimulus didn't create any jobs. Now, look, I can understand you didn't think they spent it on the right thing or the wrong kinds of taxes were cut or many, many objections could be raised, but the whole notion that the government could have spent $800 billion without creating jobs, I mean, think about it. How could anybody do that?

  • 11:08:53

    REHMSo what kinds of jobs did that stimulus create?

  • 11:08:58

    BLINDERWell, one of the problems is there all over the lot. So a big hunk of it was tax-cutting and that creates more spending and creates jobs all over the lot. An identifiable sort of it, though, it takes a little subtlety of mind is saving jobs that otherwise states and local governments would have been jettisoning left and right, so policemen, teachers, maintenance people, all kinds of folks like that. So those are jobs saved rather than created. And then a few identifiable ones in the infrastructure building and things like that scattered around the country.

  • 11:09:37

    REHMOf which we still need lots more.

  • 11:09:40

    BLINDERYou know, not everyone agrees with that. I agree with you.

  • 11:09:44

    REHMYeah, yeah.

  • 11:09:44

    BLINDERI think we do need lots more.

  • 11:09:46

    REHMAnd you talk about this perfect storm of elements that all came together. Talk about those.

  • 11:09:55

    BLINDERWell, I guess I should start with euphoria. We had a number of years in the economy, but especially in the financial markets, 2003, 2004, 2005, where basically house prices were just soaring, nobody was defaulting on their mortgages. I mean mortgage default rates in normal times are always low. It's a relatively safe form of lending in normal times. And they reached lows that we had never seen, basically, before. So bankers and others and security investors started thinking, this is like government bonds.

  • 11:10:34

    BLINDERThis is safe enough for Grandma. And people started building on top of these mortgages. Let me call them crazy derivatives. Now, the people that built them maybe still don't agree with that, but I think crazy derivatives. People making leverage bets on the proposition that none of these mortgages were going to default. And of course we know what happened.

  • 11:10:56

    REHMYou know, in the book you talk about disgraceful lending practices.

  • 11:11:05


  • 11:11:05

    REHMAnd there are really some unbelievable examples. You talk about Alberto and Rosa Ramirez and the New Century Financial Corporation.

  • 11:11:19

    BLINDERYeah, yeah, I mean, that was the one example I gave, there were many like that, of completely mad, crazy, I would even say, deceitful mortgages. These two poor people were making $12,000, $15,000 a year. With the help of a broker, New Century put them into a $720,000 mortgage.

  • 11:11:39

    REHMAnd lied about the amount of money they were making.

  • 11:11:44

    BLINDERAnd someone, not them, wrote down $15,000 or $12,000, I can't remember, a month, not a year.

  • 11:11:50

    REHMA month.

  • 11:11:50

    BLINDERThat's not a small mistake. It's a little hard to believe it was an accident for me, anyway.

  • 11:11:55

    REHMSo how does that go through? I mean, it would seem that there would be check after check after check to make sure that the information was correct.

  • 11:12:07

    BLINDERYeah, absolutely. There should have been, but there wasn't. You had, at that time, a rampant trend towards what first they would call low doc, low documentation loans. That means you don't look for proof on much. And then we got to no doc. You don't look for proof for anything. These were also called liar loans. Now, in this case, I don't think it was the Ramirez's that were lying. It was the broker that was getting into the deal that was lying.

  • 11:12:33

    REHMAnd convinced them that they could go ahead and do this. What happened ultimately?

  • 11:12:38

    BLINDERWell, of course, they couldn't afford it. I don't know all the details of this. They actually hung on for a longer period. You would have thought they would have defaulted within a month or two. Somehow with help from the broker, who was earning commission, they held on for awhile and then, of course, the house went into default.

  • 11:12:53

    REHMSo you've got another part of this perfect storm. Where were the regulators?

  • 11:13:00

    BLINDERRight. Two prongs really. In part the regulators were swept up in the euphoria. You look, nobody's losing money, nothing is defaulting, lending looks safe and they bought in much too much to the ideology of the time of the financial innovation, this is all great, these are such smart people creating all these new financial instruments that are doing us so much good. You look back in retrospect, it's hard to believe people believed that, but they did. But, in addition, they were a deregulatory-minded group of regulators.

  • 11:13:35

    BLINDERRemember this blew up basically during the Bush administration. The bubble blew up during the Bush administration and the Obama administration inherited it. So you had at the various financial regulatory agencies people -- it's probably too strong to say they just believed in laissez-faire and no regulation. I don't think that's right. But they believed in a light regulatory touch. And they believed that the markets and the bankers pretty much knew what they were doing.

  • 11:14:03

    REHMBut didn't you have people like Alan Greenspan talking about so-called irrational exuberance, certainly as far as the markets were concerned?

  • 11:14:15

    BLINDERYeah, amazingly, that was about the stock market in 1996, which then kept rising for another four years. So he was a bit early, though he had a point. I'm not aware that he ever raised this kind of irrational exuberance concerned about the -- not so much the houses. He did say something about the houses, but the sort of wild and woolly inverted pyramid of derivatives that were built on top of the mortgages. I'm not even sure -- and by the way, this is not a criticism.

  • 11:14:46

    BLINDERBecause I'm not sure anybody knew the full extent of it. I doubt that he knew the full extent of it. I don't think anybody did, actually.

  • 11:14:52

    REHMWhat about the ratings agencies and how they contributed to the mess?

  • 11:14:58

    BLINDERYeah, so here you have Wall Street creating these contraptions, let's call them. I could use a worse, more pejorative term, but contraptions. And they're quite complicated, bits and pieces slicing and dicing mortgages. The rating agencies then come in because hardly anybody understands these things. The rating agencies then have to come in and bless the securities that result from them with some kind of a rating. And they jiggered them around enough, the Wall Streeters jiggered them around enough to get, for many of them, a AAA rating. So AAA? AAA means you could recommend this to your grandmother.

  • 11:15:38

    BLINDERIt's as good as U.S. Treasury debt. I mean, come on. I mean, what in the world were they thinking about then? I think a large part of the answer is they were not thinking about declines in house prices. Because you could see if the house prices started falling instead of rising, a whole bunch of these were doomed.

  • 11:15:58

    REHMSo all of this starts to happen in what, early, mid 2007?

  • 11:16:06

    BLINDER2006 or 2007, in that frame, yes.

  • 11:16:09

    REHMIn that frame and what happens by the fall of 2007?

  • 11:16:16

    BLINDERSo you're already seeing by then, in fact, or even earlier, going back months before that, by the spring and summer you're starting to get bad default experience in these mortgages, many of which should never have been made ever because the house prices have peaked and they're starting to fall. And these are built on the false premise that house prices will always rise and never fall. You're starting to see mortgage companies, like the New Century that you mentioned and a bunch of others, either teetering or going under.

  • 11:16:46

    BLINDERYou're starting then to see at the next level some of the big banks and brokerages, not yet going bust, but starting to look pretty dangerous. So we had, for example, BNP Paribas, gigantic bank in France and of course we had Bear Stearns.

  • 11:17:04

    REHMLehman Brothers.

  • 11:17:06

    BLINDERAnd then of course the big one was the Lehman Brothers. That was September 2008. But what you were witnessing in the time frame that you just asked about, Diane, was the beginnings of this elaborate house of cards starting to fall piece by piece. And then after Lehman Brothers it just collapsed. It wasn't slow anymore.

  • 11:17:26

    REHMNow, to what extent do you believe Lehman could have/should have been saved?

  • 11:17:32

    BLINDERI believe both could have and should have. Now, I know Ben Bernanke, who was a friend of mine from our Princeton days, doesn't agree with that and he has a point. What Bernanke and Paulson, who was Secretary of the Treasury, said after a number of other rationalizations, was that they didn't have the legal authority to do this. Remember, there was no TARP. Had they had the TARP that could have been used to do a better job on Lehman. They didn't have that then. They weren't sitting on a huge pile of money that they could use for this purpose.

  • 11:18:05

    BLINDERAnd from the Federal Reserve point of view, they decided that it was beyond their legal authority to save Lehman because it was insolvent. Whereas, with Bear, they said, well, this is solvent, but just illiquid. Now, I'm, first of all, not convinced that the difference was that stark, but fundamentally, this became a question of whether you want to obey lawyer A or lawyer B. You know there's always a lawyer who says, no, no, no, you can't do that. And there's always another lawyer that says, you know, you could do this if you stretch.

  • 11:18:36

    REHMAlan Blinder is professor of economics, public affairs at Princeton University, former vice chair of the Fed. His new book, "After the Music Stopped."

  • 11:20:05

    REHMAnd welcome back. Alan Blinder is with me. He is the author of the brand new book titled, "After the Music Stopped: The Financial Crisis, the Response and the Work Ahead." I know many of you will want to join the conversation. You can call us, email us, follow us on Facebook or send us a tweet. Another of the villains you write about is what you call crazy compensation systems. So you're talking there about guys at the top.

  • 11:20:48

    BLINDERAnd they were mostly guys, if truth be told, yes.

  • 11:20:51

    REHMAnd they were mostly guys and who else?

  • 11:20:55

    BLINDERI'm talking -- you know, actually I am talking about the guys at the top, but I'm talking much more about the people that work for them, the traders that were trading these derivatives and CDS, credit default swaps and other things like that, that were basically -- that basically face the compensation system that if they made a huge amount of money for the company, they themselves became richer than creases.

  • 11:21:19

    BLINDERNever mind that it might all collapse next year or two years from now, they got paid. Whereas if they failed, if they made bad trade, lost money, they might lose their job, they would certainly lose their bonus. They might lose their job. They would get another job and so on. So the incentives were incredibly skewed, unbelievable rewards on the upside, relatively slap on the wrist on the downside.

  • 11:21:44

    BLINDERMuch the same was it in a very different context was true of the mortgage brokers. They were basically signed for signing -- paid for signing people up. Never mind if three years from now the mortgage went into default. And in fact, they would get more money for the crummier mortgages because they tended to have higher interest rates and other fees associated with them. So, again, you have this very perverse incentive system for the ground troops, so to speak, allowed of course by the people at the top.

  • 11:22:14

    BLINDERSo when you started your question with the people at the top, do they have culpability for this? Absolutely they do.

  • 11:22:21

    REHMBecause at some level they had to understand what was going on, what kinds of mortgages were being pushed. But, okay, so the Obama administration comes in, inherits this huge mess that has already been underway, how did they respond?

  • 11:22:44

    BLINDERI think very well with one big exception, which we might come back to, which is mitigating the wave of foreclosures that was headed on the way. In fact, it was already in train then. Other than that, I think they responded very, very well. The stimulus that we're talking about a few minutes ago, it wasn't the greatest design you could have, but let's remember you have to get this through Congress.

  • 11:23:06

    REHMShould have been more?

  • 11:23:08

    BLINDERI think it -- well, in the abstract, if I just speak as an economist with no politics, I think it should have been more.

  • 11:23:15

    REHMLike how much?

  • 11:23:16

    BLINDEROver a trillion.

  • 11:23:18

    REHMOver a trillion.

  • 11:23:19

    BLINDERBut, the important but, is if you ask -- if I was in the Obama crowd in the White House there, I wouldn't have been pushing for that because it was impossible. There was no way on earth you were going to get that through Congress.

  • 11:23:30


  • 11:23:31

    BLINDERPolitics, yeah. The president is not a dictator, as we know. So I think subject to political compromises that he had to make and so on, the stimulus was pretty good. The execution of the TARP, remember that was a Bush -- people forget that, by the way, they think Obama brought in the TARP, that was Bush. The execution of the TARP under Tim Geithner's leadership was, I think, quite good.

  • 11:23:58

    BLINDERI think they used the money intelligently and well. And by the way, another thing that people don't know is that the financial aspects of the TARP -- remember TARP later came to used for General Motors and Chrysler and so on...

  • 11:24:10

    REHMRight, right.

  • 11:24:10

    BLINDER...and other stuff. The financial aspects of the TARP turned to profit for the taxpayer, a nice profit for the taxpayer. So it didn't even cost a nickel.

  • 11:24:19

    REHMSo GM paid every dime back?

  • 11:24:22

    BLINDERNo, GM, there's still going to be some loss most likely from GM. But all the banks, name them and they were many of them. And even AIG, it was in the news recently, AIG finally paid back with a profit.

  • 11:24:35

    REHMAnd then what did AIG do?

  • 11:24:38

    BLINDERWell, they flirted with the idea of suing the government because they didn't get a good enough deal. That was a little wacky. Fortunately, common sense prevailed and they didn't.

  • 11:24:48

    REHMBut still the stockholders.

  • 11:24:49

    BLINDERThere's a private shareholders that goes on, you know, this is America, anybody can sue anybody for anything. And so they were suing.

  • 11:24:57

    REHMBut I mean, explain to me what sense that makes even for the shareholders.

  • 11:25:03

    BLINDERWell, for the shareholders, if you don't care at all about your public relations image and it's all about money, you are going to court with the argument that the government sort of coerced you into a bad deal and you, the shareholders, should have gotten more money. They didn't get much. They were pretty much wiped out. And, you know, you roll the dice and you take your chance on the court, maybe you'll win, maybe you'll lose. That's the sense for them.

  • 11:25:31

    REHMBut isn't that what you do in the market in general, you put your money...

  • 11:25:37


  • 11:25:37

    REHM...where your thoughts are?

  • 11:25:40


  • 11:25:40

    REHMYou roll the dice, you either win or lose.

  • 11:25:43

    BLINDERExactly. And you could argue, they were about to lose big until the government came in.

  • 11:25:48

    REHMSo now they're going to sue. What did other governments, particularly in Europe, do to help or hurt?

  • 11:25:59

    BLINDERRight. So the response was very varied. And the British, which sort of the most like us, not exactly, did with -- they didn't call it TARP, so I guess I should have said, under Paulson, the TARP was basically used to -- the jogging term is recapitalize banks. What does that mean? It means buy shares in the banks so that the banks have some capital. And the government then becomes a part owner.

  • 11:26:24

    BLINDERI mean, we call that socialism in America. We don't do it lightly. So Gordon Brown, who was leading the British government, did that and got a lot of applause from the market. Shortly thereafter, Hank Paulson decide to do the same thing with the TARP even though it's designed -- remember TARP stands for Troubled Assets Relief Program. It was sold to Congress on the notion that we, the government, needed to buy these troubled assets to restore some semblance of a market, which had collapsed.

  • 11:26:54

    BLINDERI thought it was a good idea actually. But that got changed to the sort of the British formula, to actually use the money to recapitalize the banks. Ironically, the Federal Reserve later started a program called TALF, never mind what it stands for, I'm not sure I can remember myself, that was designed to fill the original TARP purpose to buy these troubled assets.

  • 11:27:19

    REHMSo here we are, 2013, and you still got lots of people in this country angry about what happened, still blaming the government.

  • 11:27:37


  • 11:27:37

    REHMIs it because we just don't get it? What is the problem?

  • 11:27:43

    BLINDERYeah, I think we're back to where you started the interview. I think it's partly we just don't get it and partly that people are trying to make sure we don't get it. There's been a lot of disinformation. I talked about the stimulus, also the TARP. Americans don't realize we turned a profit on the TARP, for example. I think -- so there's been deliberate disinformation by people in the industry, by people on the Republican right, for example.

  • 11:28:11

    BLINDERAnd also, as you mentioned at the start, I think the Obama administration, which did a very good job on the policy, did a very poor job on the messaging and the politics of this bailout. Now, mind you, it was never going to be popular. You cannot design a bailout for banks that's ever going to be popular. But there are degrees, you know. If you think about a one to ten scale of how much the electorate hates this, we didn't need to get a 10.

  • 11:28:39

    BLINDERMaybe we could have gotten a three or a four with a better public relations. Just more explanation. Try to think how many times you heard President Obama or Secretary Geithner get on the air explaining what was going on.

  • 11:28:55

    REHMBut what they didn't explain, what they didn't do when they got the banks back on their feet, the expectation was the banks were then going to be more ready to deal with these mortgages, to loan more money to individuals and they didn't do it.

  • 11:29:20

    BLINDERThey didn't do it. And it's in a sense they still haven't. You're hitting one of my pet peeves about the TARP. So I was appraising the TARP. But in its original design by Secretary Paulson in the Bush administration, what was asked of the banks in return for the capital infusion was basically nothing. I exaggerate only slightly. But in particular to your question, I would have put on -- if I had a magic wand at the time, and I said so at the time as did other, I would have put on, for example, a lending requirement.

  • 11:29:57

    BLINDEROkay, you know, we don't tell, in normal functioning capitalism, we don't tell bankers to whom to lend or how much or anything, and we shouldn't. But if they're coming to the public trough and taking public money, seems to me the public has a perfect right to ask for something in return.

  • 11:30:14


  • 11:30:15

    BLINDERAnd a sensible thing in return would have been just what you were pointing to, Diane, some requirement to increase lending, something. There was none.

  • 11:30:22

    REHMAnd the second part of your subtitle, the work ahead. You say we're still not safe. We could face other big problems. Like what?

  • 11:30:39

    BLINDERWell, you could -- if I go back a little bit, a few months where we were still really worried about Europe blowing up financially, we don't yet have the procedures fully in place, and of course not tested, to -- I don't want to say insulate -- but to cushion us very much from a Lehman 2 scenario. Now we do have, thanks to Dodd-Frank a new -- it's called an orderly liquidation procedure, which is a way to put a company like Lehman, should it be necessary, to bed gracefully rather than just say see you in bankruptcy court and let the chips fall where they may.

  • 11:31:17

    BLINDERThat's what we did in 2008. We now have a way for a short-term government takeover and a gradual wind down, which is a good thing. But it's not been tested yet. Many of the other provisions in Dodd-Frank such as Volcker Rule for proprietary trading haven't even been put in final form. It's still getting drafter and argued about.

  • 11:31:41

    REHMAnd what would that do?

  • 11:31:43

    BLINDERThat is supposed to take banks -- well, I don't want to speak for Paul Volcker. It's supposed to take banks out of what is perceived by many people as gambling on securities of various sorts, mostly bonds and derivatives and things like that, and just take that out of the banks because the banks have this backstop from the FDIC. They will not go under. If necessary, the government will come in and save all the depositors, which it does and it should.

  • 11:32:12

    REHMUp to?

  • 11:32:13

    BLINDERUp to $250,000 per account.

  • 11:32:15

    REHMRight, right.

  • 11:32:16

    BLINDERThat's exactly right. So the difficulty there is to finding what's a proprietary trade as opposed to market making. And this battle is still going on. Another battle that's still going on is over derivatives. I'm on one extreme of that, which is that as many derivatives as possible, which will never be 100% should be made standardized and traded on organized exchanges, where you have transparency and everybody knows the price and so on as opposed to customized.

  • 11:32:50

    BLINDERSo I call you, you call me, and we make a deal. There'll always be some of that. And we're not trying to stamp it out, but it should never have been allowed to grow to the magnitude that it did, which when the house of cards crumbled, that was the biggest room in the house.

  • 11:33:07

    REHMPrinceton economist Alan Blinder. His brand new book is titled, "After the Music Stopped." And you're listening to "The Diane Rehm Show." We have a number of callers waiting. I'm going to open the phones now, 800-433-8850. First to Sycamore, IL. Good morning, Paul.

  • 11:33:36

    PAULYeah. Good morning, Diane. Thanks for having me on.

  • 11:33:39


  • 11:33:40

    PAULMy question for your guest is about the whole mortgage situation and if he feels it would be better if mortgages were not allowed to be sold, they had to, in other words, the originating bank had to resume full responsibility for that mortgage because they were stuck with it forever. And if the mortgage went under, that bank was the one who was left holding the bag. Go ahead.

  • 11:34:07

    BLINDERPaul has a point in that banks were unloading these on securitizes and holding them for, you know, maybe 36 hours and therefore not very much worried about whether they default. Now there are provisions in standard contracts for these mortgages to bounce back to the banks if they're deemed to have been reckless and inappropriate and so on. But I think my main answer to Paul is I wouldn't advocate that.

  • 11:34:35

    BLINDERI have advocated and I do advocate keeping some skin in the game, some fraction, maybe 10 percent or something like that for the very reasons that he's worried about. But the mortgage market was vastly improved in size, liquidity and safety by securitization in its early days. Securitization did not start in 2003. It dates back decades and decades before that. And when it was just sort of plain vanilla mortgage pools, it made a lot of sense in terms of diversification.

  • 11:35:09

    BLINDERInstead of one bank making all of its mortgages in Chevy Chase, MD and surrounding areas, banks could swap them around...

  • 11:35:17


  • 11:35:17

    BLINDER...so they had more diversified portfolios and therefore should there be a reversal in the local community, the bank didn't go down with the crowd. That's still true. And it would be nice if we could get back to the kinder, gentler form of securitization that worked very well for decades.

  • 11:35:36

    REHMHere's an email. It says, "The Bank of America recently paid Fannie Mae more than $11 billion to settle falsely represented securitized mortgages sold to Fannie Mae. Fannie Mae bought those instruments late in 2008 at the behest of President Bush who was frantically trying to stave off the inevitable crash. That purchase later allowed conservatives to blame Fannie Mae for the meltdown. Can you explain the details of that debacle?"

  • 11:36:21

    BLINDERI can't explain the details of that particular transaction, but let me say something about the debacle that's being referred to there. Quite a few people in the political right tried to make Fannie and Freddie probably the biggest villain in this. Now, they do belong on the list. I mean, they behaved badly and they made terrible mistakes. And furthermore, the design of the institutions was poor to begin with and needs to be changed into the future.

  • 11:36:53

    BLINDERBut the truth is that Fannie and Freddie came in late to the party. So this particular is transaction is 2008. I mean, the house of cards has crumbled by then and people are trying to pick up the pieces. They were never the largest piece of it. The private companies, the so-called private label securitizers were always larger. And thirdly, if you look in the universe of questionable mortgages, Fannie and Freddie had the better ones, not the worst ones.

  • 11:37:23

    REHMAlan Blinder, his new book, "After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead."

  • 11:40:04

    REHMAnd if you've just joined us, my guest today is Alan Blinder. He is professor of economics at Princeton University. He is the author of a brand new book all about what happened during the financial crisis and problems we need to concern ourselves with going forward. The book is titled "After the Music Stopped."

  • 11:40:37

    REHMHere's an email saying "The New York Fed under President Tim Geithner had regulatory authority over all of the too-big-to-fail banks. The Fed was supposed to ensure they had prudent practices and were not overleveraged. Another total failure by the Fed. The main lesson is we need a competent Federal Reserve. We should hold the Fed and their 200 PhD economists to a higher standard than Joe Six-Pack who takes out a mortgage he cannot afford. If the Fed had been halfway competent the crisis would either not have occurred or been much smaller." How much does the Fed have to blame here?

  • 11:41:40

    MR. ALAN S. BLINDERI think the Fed does have a fair amount of the -- needs to accept a fair amount of blame, though it's often said, as your emailer said, the Fed. It's the bank regulatory agencies. The Fed was one out of four. That doesn't excuse it because it fell down on the job just as the other three did. And while I was praising the Fed before, the praise for the Fed really starts after Lehman Brothers. There's very little that you can praise in the Fed's behavior in the run-up to the crisis.

  • 11:42:06

    MR. ALAN S. BLINDERThey did allow, as your listener said, a lot of imprudent lending that they should never have. They didn't need additional authority. They had the authority to crack down on that. The four regulatory agencies acting together. They said many times in the years leading up to the big bust that they were going to do that. And somehow they never could get their act together and never really did it. I think it was 2007 when they finally did it. I mean, the horses were out of the barn by then.

  • 11:42:39

    MR. ALAN S. BLINDERSo to put it mildly, the Fed did not cover itself with glory. That's the Fed in Washington and all the regional Feds and the New York Fed, as your listener suggests. The only correction I'd make is they didn't actually -- the New York Fed did not have authority over all the big institutions.

  • 11:42:59

    REHMAll right. To Clearwater, Fla. Hi, Jeff.

  • 11:43:05

    JEFFHello. Can you hear me?

  • 11:43:05

    REHMYes. Go right ahead.

  • 11:43:08

    JEFFOh, hey, I have two questions. I'll try to make them as quick as possible.

  • 11:43:11


  • 11:43:11

    JEFFOne, I hear a lot of people on the right blaming the community reinvestment act for being the jumping off point of this thing and forcing banks to lend money to people that couldn't afford them, first of all. And second of all, what -- are these banks still too big to fail? From what I see they were too big to fail. We had a problem and now they are still too big to fail. Is there no such thing as a monopoly anymore? Is it not prudent to bust the banks up and make them smaller banks so we don't have that as being a possible problem in the future?

  • 11:43:47

    BLINDEROkay. So let me take the first question first. The Community Reinvestment Act, the CRA. This is part of the right wing propaganda mill, I think, to blame Fanny and Freddie as we were talking about before, and the Community Reinvestment Act. Now the Community Reinvestment Act passed Congress in 1977.

  • 11:44:08

    REHMDesigned to do what?

  • 11:44:09

    BLINDERDesigned to spur lending into what was then called redline districts. They were literally getting redlined on -- we used to use paper in those days.

  • 11:44:19


  • 11:44:19

    BLINDERWe were drawing red lines around these poor districts and they were considered too dangerous to lend. So Community Reinvestment Act was kind of affirmative action for bank lending. Now you could be for that or against it. I'm for it. Some people could be against it. But the idea that we're going to blame something that started in 1977 for the housing crisis is -- and all the derivatives and all that stuff is, you know, borderline nutty I think.

  • 11:44:48

    BLINDERNow people then say, well it was modified in 1995 to give it more teeth. Yeah, I think the 1995 modifications were quite sensible. The data that were collected by the Fed and others in the years after 1995 did not show a lot of losses because of CRA lending. And again, 1995 is a long time before 2007. So, you know, I think that claim is just thin in the extreme. The too-big-to -- so the question is are these institutions still -- some of them still too big to fail? They absolutely are.

  • 11:45:23

    BLINDEROne of the negative spillovers of the crisis, and there were many is that some of the biggest institutions got even bigger. Some of them shrunk. Citi is now smaller than it was but J.P. Morgan Chase, for example, Banc of America, bigger than they were. When you have institutions that large you need to watch them like a hawk first of all. And we're doing that with much tighter supervision...

  • 11:45:49


  • 11:45:50

    BLINDER...from the bank regulators, especially the Federal Reserve. And now we have this thing called the FSOC, the Financial Stability Oversight Council in Washington.

  • 11:45:58

    REHMDo you really feel confident?

  • 11:46:01

    BLINDERDo I really feel confident? Well, more confident than I did before, let's put it that way.

  • 11:46:06

    REHMOkay. But you weren't very confident before.

  • 11:46:07

    BLINDERIt's not like -- yeah, you're right. It's not like all the dangers are gone. And that's why I wanted to bring up, we do have a Dodd-Frank law, this orderly liquidation. If, god forbid, the Banc of America say or any of them, should come to the point where it looks like it was in danger of failing, the government will take it over and liquidate it slowly rather than in a raucous unruly and very damaging way as happened with Lehman Brothers.

  • 11:46:35

    REHMDo you think that any of those big banks out there now could go under?

  • 11:46:43

    BLINDERI don't think so now.

  • 11:46:46


  • 11:46:46

    BLINDERYou told the question now. Who knows what'll happen three, four years from now. They look much, much healthier than they were going into the crisis.

  • 11:46:54

    REHMSeveral emailers want to know how much to blame repeal of the Glass-Steagall Act and whether you, Alan Blinder, think we should reinstate that act.

  • 11:47:09

    BLINDERRight. I don't, and I deal with this in the book. I get this question all the time. I think the notion that repeal of Glass-Steagall, that was in 1999, was a major contributor to this crisis is a gross exaggeration of history. When I ask people and say, well what do you think happened because of Glass-Steagall the only answer I ever get back that's coherent is CitiGroup was a merger allowed by the repeal of Glass-Steagall of insurance and brokerage -- well, especially insurance and banking.

  • 11:47:43

    BLINDERMost of the big, big problems that we had in the crisis were pure banks, like Banc of America -- they didn't have Merrill Lynch then -- it was Banc of America, or were pure brokerages like Bear Stearns, Lehman Brothers and so on. It was not from the intersection of the two. The only exception being Citi. And when people say well it was because of Citi, first of all Citi was not the whole problem. Citi was a piece of the problem.

  • 11:48:14

    BLINDERSecondly, if you look at the history of banking crises in the United States for the last 50, 70 years, you're hard pressed to find any in which Citi was not right in the middle under Glass-Steagall. Just the last one was after Glass-Steagall. So it's not like CitiGroup was always perfect until it was allowed to merge with an insurance company.

  • 11:48:34

    REHMAll right. So do you believe that had Glass-Steagall remained that the crisis might have been lessened?

  • 11:48:45

    BLINDERNo. I believe it wouldn't been...

  • 11:48:46

    REHM...it would've been the same.

  • 11:48:48

    BLINDER...gone more or less the same as it did...

  • 11:48:49

    REHMReally? Okay.

  • 11:48:50

    BLINDER...because these were happening in specialized institutions.

  • 11:48:53

    REHMAll right. To Wenatchee, Wash. Good morning, Charles.

  • 11:48:58

    CHARLESGood morning, Diane. Thank you very much for taking my call.

  • 11:49:00


  • 11:49:02

    CHARLESHere in Wenatchee Valley we had one of the hottest residential real estate markets in the country back in '06. And I watched properties escalate in value just exponentially drawing in money from California and other places, just buying up properties and letting them sit. And my question is, I've never heard hardly anybody comment about did the real estate industry, and particularly appraisers, play any role in this mortgage debacle by the inflating of the values of all these properties all across America?

  • 11:49:39

    BLINDERI think they did play a role. I think the -- it wasn't a major role in the sense that the inflating of the properties was for the most part real. There was a big property bubble and people wanted to buy and they weren't thinking about the down size. And that's most of it. Now there was a role of the appraisers in that to get some of these ridiculous mortgages, you needed a ridiculous appraisal to go along with it saying that this house is actually worth this much. And it makes sense to lend sometimes 97 percent of the value of the house to turn that into the mortgage, and only three percent is down. Some were worse than that.

  • 11:50:18

    BLINDERAnd there were a whole lot of people in the industry complicit in that nonsense and one group was at least some appraisers. So I think you're right to give some blame to the appraisers, but the fundamental thing was the property bubble. You know the old Pogo saying, the enemy was us.

  • 11:50:37

    REHMHere's an email saying, "These no doc or liar loans were advertised on the air right here in D.C. When a scheme such as liar loans and exotic financial products is a sham it's fraud, yet so few are held accountable. Justice is yet to be served."

  • 11:51:07

    BLINDERWell, I think that's basically right with -- but with one important exception. Fraud -- the word fraud is a criminal offense and requires a heavy burden of proof. And it's not clear that all of these things or even the majority were frauds. I like to use the term fraud and near fraud. Fraud is a legal term. Near fraud is a moral term when you've mislead people grotesquely, even if you stay just an inch or a millimeter on the correct side of the law. And there was a huge amount of that.

  • 11:51:39

    BLINDERAnd I totally sympathize with your listener and I take this issue up in the book. I think one of the reasons -- not the only one but one of the reasons the American public was and is so hopping mad about this is that basically practically nobody went to jail. Having said what I just said about fraud and a high standard of proof, I can't believe that two or three or five people are the only ones that broke the law in this crisis. I can't believe that.

  • 11:52:10

    BLINDERIn the case of the savings and loan crisis back in the late '80s and early '90s, I believe 700 people went to jail -- 700, 800, in that kind of range. Here you're talking about more like 7 or 8 in a vastly bigger crash and series of misdeeds. So I very much sympathize with the sentiment but the one provisor was fraud as a high bar to prove legally.

  • 11:52:38

    REHMAll right. To Jay here in D.C. Good morning.

  • 11:52:43

    JAYGood morning. Thank you, Diane.

  • 11:52:46


  • 11:52:47

    JAYAlan, I'm looking forward to your book...

  • 11:52:49

    BLINDERThank you.

  • 11:52:50

    JAY...and I was interested in the contribution of the tax increases in the '90s to deficit reduction as opposed to the spending cuts. And what is the relevance of that today?

  • 11:53:07

    BLINDERWell, I think what you say in the -- you're referring to the Clinton tax increases in the early '90s, right?

  • 11:53:11


  • 11:53:12

    BLINDERWhat you saw there is the falsity of the claim made then by the Gingrich Republicans that what was then -- what was actually a fairly modest increase in taxes. It wasn't like Clinton was putting the tax rates back to Eisenhower levels. It was pretty modest and that's of course what we were fighting about this past several years going back there to a top rate of 39.6. The predictions then were that this was going to cause one of the worst recessions we ever had and wouldn't actually gain any revenue because the recession would be so bad it would know out all the revenue.

  • 11:53:49

    BLINDERNow, in fact, we had a boom in the remainder of the 1990s. Now I'd be one of the last people on earth to say the way to get a boom is to raise taxes. My point is only that it didn't stop us from getting a boom because it wasn't that big a downer on the economy. And it did a world of good for the deficit problem.

  • 11:54:10

    REHMAnd you're listening to "The Diane Rehm Show." So would you be in favor of the president's position now to increase taxes on those making above a million dollars?

  • 11:54:28

    BLINDERYeah well, the compromise was on $400,000. I absolutely support that. You know, there are still lots of things to do. The Republicans have said now the tax issue is closed, it's over. I mean, this compromise led to under $60 billion of revenue per year in a budget that's in the red to the tune of a trillion. So that's a step but to say that now we don't need any more revenues I think is grossly unrealistic.

  • 11:54:57

    BLINDERThere are still loopholes to be closed. My favorite or least favorite, my pet peeve, is the so-called carried interest provision whereby proprietors of hedge funds and private equity funds pay a 15 percent tax rate basically on most of their income, while we wage earners are about to -- well, starting this year pay 39.6. I mean, what is the justification of that? Even the people in the industry have a hard time justifying it, other than the fact because they don't want to pay higher taxes. Nobody wants to pay higher taxes. I don't blame them for that. I blame the Congress for not fixing that loophole. And that's just one example. There are many, many examples like that.

  • 11:55:36

    REHMSo where do you see the country going at this point?

  • 11:55:41

    BLINDERWell, right now the economy's kind of limping up the staircase. If -- take an image of a elderly gentleman or lady who can still walk but has trouble navigating steps, and that's what the economy's doing. It is going uphill. It's not going fast. Some of the...

  • 11:55:57

    REHMMaybe it shouldn't go fast.

  • 11:56:00

    BLINDERWell, it should go much faster right now because we have so much slack. there will be a time -- we will get there where we're back to full employment and relatively full utilization over industrial capacity.

  • 11:56:12

    REHMFull employment being 5 percent or so, 6 percent?

  • 11:56:15

    BLINDERYeah, get me anywhere in the 5 to 6 percent range and I'll be happy. I think we could probably push it lower but, hey, if I could see 5.8 tomorrow I'd be happy as a clam.

  • 11:56:26

    REHMAnd Europe, how is that going to affect us?

  • 11:56:30

    BLINDERI think unless Europe has a financial cataclysm, which is now looking much, much less threatening than it was six months ago, so not very likely, the deleterious effects of the European slump on America are there but they're pretty minor. Most of what American business does it to produce things for Americans. A small amount is to produce things for Europeans and that will be damaged.

  • 11:56:58

    REHMAlan Blinder is professor of economics and public affairs at Princeton University, former vice-chair of the Federal Reserve's Board of Governors, a member of President Clinton's Council of Economic Advisors and author of his latest book "After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead." Thank you so much.

  • 11:57:30

    BLINDERWell, thank you, Diane. It's been a pleasure.

  • 11:57:32

    REHMGood to have you here. And thank for listening all. I'm Diane Rehm.

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