After the Music Stopped

Blinder, a Princeton economist and former Federal Reserve vice chairman, wrote an explanation of the financial crisis, the policy response and the aftermath, aimed at general readers but written by someone who understands the technical material.

The causal account identifies multiple contributing factors rather than a single cause: the housing bubble; the deterioration of mortgage underwriting; the securitisation chain that separated the originator from the ultimate holder and removed the incentive to assess credit; the rating agencies' failure and the conflict created by issuer payment; excessive leverage across the financial system, particularly at investment banks and in off-balance-sheet vehicles; the growth of credit derivatives without central clearing or collateral discipline; regulatory gaps including the exemption of derivatives and the absence of any regulator with a systemic mandate; and compensation structures rewarding volume and short-term results.

The policy chapters explain what was done and defend most of it. Blinder walks through the Federal Reserve facilities, the Troubled Asset Relief Program, the stress tests which he regards as the single most effective intervention, the automobile rescues, and the fiscal stimulus. He argues that the response prevented a depression, that it was less costly than the public believes since most of the capital was repaid, and that it was politically catastrophic because it appeared to rescue the people responsible.

The reform chapters assess the Dodd-Frank Act, identifying what it addressed and what it did not.

Blinder is a participant in the policy world defending broadly the actions taken, and readers should weigh that. His treatment of alternatives, particularly on mortgage principal reduction where he is critical of what was done, is more nuanced than his defence of the bank rescues. The book is one of the clearest single-volume explanations of the technical mechanisms for a non-specialist reader.