After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead

Image of After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead
Release Date: 
January 24, 2013
Penguin Press HC
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“After the Music Stopped is better read for background context than for strategy, programs, or initiatives that might make a real difference.”

Former Citigroup CEO Chuck Prince infamously proclaimed on July 8, 2007, “When the music stops . . . things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

The consequences of the sentiment expressed by the Dancing Fool who presided over one of the largest banks is the focus of After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead, the highly praised financial history by Princeton Professor Alan Blinder, who in the 1990s served as Vice Chairman of the Federal Reserve Board of Governors and as a member of President Clinton’s Council of Economic Advisors.

Professor Blinder places himself purely in the camp of Thucydides rather than Herodotus, emphasizing chronology over big themes, “The narrative offered here is largely chronological. After all, stories are best told that way, and this is quite a story.”

Beyond the chronology, three critical questions are explored: “How did we ever get into such a mess?”

“What was done to mitigate the problems and ameliorate the damages, and why?”

“Did we ‘waste’ the financial crisis of 2007–2009—and the manuals or did we put it to good use?”

The third question refers to former White House Chief of Staff Rahm Emanuel proclaiming in November 2008 at the heart of the crisis, “You never want a serious crisis to go to waste.”

The approach he takes and an overview of how he pursues his topics are reflected by chapter titles, including The House of Cards . . . When the Music Stopped . . . Stimulus, Wherefore Art Though, Stimulus . . . The Attack of the Spreads . . . It’s Broke, Let’s Fix It: The Need for Financial Reform . . . Watching a Sausage Made . . . The Great Foreclosure Train Wreck . . . No Exit? Getting the Fed Back to Normal . . . The Big Aftershock: The European Debt Crisis . . . Never Again: Legacies of the Crisis.

Framing the issue, the author explains that in world of Dancing Fool CEOs, “The high-stakes game of musical chairs turned out to be remarkably short on seats, and large swaths of the financial industry fell rudely on the floor.

The U.S. economy subsequently sank into its worst recession since the 1930s. The U.S. government, which was led at the time by a bunch of alleged free-marketers, was called upon to ride to the rescue multiple times—not because the financial firms deserved it, but because the chaos threatened to pull us all of us down into the abyss with them.”

In grading subsequent overall economic performance, he writes, “In truth, U.S. macro economic performance since the fall of 2008 doesn’t merit even proverbial gentlemen’s C, it has been the worst in post-World War II American history. Give it an F instead.”

In his telling Alan Blinder identifies seven villains:

1. Housing bubble
2. Bond bubble
3. Regulatory shortfalls
4. Sub prime lending disgraceful practices
5. Complexity run amok
6. Overrated rating agencies
7. Crazy compensation schemes

Collectively, these villains conspired to create a “fragile house of cards” that collapsed, with the consequence that Main Street was called upon to bail out the wrongdoings of Wall Street.

Several years later, Wall Street collectively and the majority of its participants enjoy a very comfortable lifestyle, their financial positions largely unperturbed, yet the country’s finances and an extraordinary number of individuals who reside on Main Street rather than Wall Street have had their lives irrefutably disrupted and their financial circumstances largely destroyed.

Alan Blinder advances a policy agenda that embraces emphasizing the economy, responsible fiscal policy and budget discipline, shrinking the Federal Reserve’s bloated balance sheet—now $3 trillion of assets vs. $900 billion before the crisis, coping with pervasive moral hazards—involving the overcoming of expectations that government will rescue financial miscalculation in a continuing version of the “heads you win, tails the taxpayer loses” game, dealing with the overhang of mortgage foreclosures, reestablishing a new mortgage system, and writing a new financial regulatory rulebook.

Unfortunately, for all of the experience, perspective, and wisdom that Alan Blinder possesses, he offers a far less sharply drawn prescription than might be expected given his third critical question he poses, concerning putting the financial crisis of 2007–2009 to good use.

The question he poses, “Did we waste the financial crisis or use it well?” is answered in the vocabulary of equivocation. Discouragingly, Professor Blinder answers the question about whether the crisis was wasted by ignoring it.

He concludes, “Bubbles will be back. So will high leverage, sloppy risk management, shady business practices, and relaxed regulation. We need to put in place durable institutional changes that will at least make financial disruptions less damaging the next time the music stops.”

Essentially, his conclusion mirrors that of the student who crams to pass a test, but then retains nothing of those lessons to apply the next day. To this end, Professor Blinder writes that nations and people learn from their experience, but “it’s just that they forget, often quickly.”

The lessons he draws are no more than generalized platitudes lacking a decision focus, as reflected by his ten financial commandments embracing, “Thou shalt remember that people forget, not rely on self-regulation, honor thy shareholders, elevate the importance of risk management, use less leverage, keep it simple, stupid, standardize derivatives and trade them on organized exchanges, keep things on the balance sheet, fix perverse compensation, and watch out for ordinary consumer-citizens.”

Perhaps the good professor is too much of a politician. What he does not say suggests that if pressed, in a context in which his political sensitivities would not veer toward the indirection and non response, he would acknowledge that the crisis fell far short of being “a catalyst for much needed change.”

This book is not the policy treatise that provides either guidance or hope for the future.

After the Music Stopped is better read for background context than for strategy, programs, or initiatives that might make a real difference.

In some ways the After the Music Stopped book is like a sushi meal: delicious to eat, but leaving you hungry an hour later.

The very tentativeness of the author’s position and his disinclination to employ a strong bang-the-table, this-is-what-must-be-done style is evidenced by such admonitions as “Maybe this is a good time to turn some serious attention to reestablishing a mortgage system we can live with.”

Say what? How can the economy prosper without a mortgage system?
Sadly, this and other critical questions are neither posed nor answered.