Friday, February 15, 2013

Alan Blinder and the Treehouse Syndrome

Halfway through Alan Blinder's After the Music Stopped: The Financial Crisis, the Response and the World Ahead--it's a rewarding read, one of the best I've run across on the financial crisis so far (and I've read them in numbers way beyond the point of cost effectiveness).  I suspect what we've got here is the transcript of his "crisis" course for undergraduates--and that is no bad thing, not a bit worse than watching Yale on-line or some such.  It's far shorter on anecdote, much richer in analysis than the standard presentation.  For comparison, I think I've said before that you might rank these books in inverse order as indexed by the number of F-bombs: on this scale, it is important to report that Blinder is (so far) an F-bomb free zone, which I count as a plus.

Blinder also displays a gentlemanly nonpartisanship.  As a former Vice-chair of the Fed, he's obviously deep into the system and you'd certainly have to account him among those who believe that the system, within broad limits, works.  But is temperamental disposition doesn't inhibit his disapproval for so much of what went on before the great meltdown--of how much, to put it shortly, we brought it on ourselves (or at least "they brought it on themselves," which is different, but perhaps not greatly different).  He makes it clear, inter alia, that he does not buy into the "Barney Frank done it" school of crisis analysis--the school that blames it all on the Congressional Darth Vaders who made the banks their bitch and forced them to make lunatic loans to the unemployable and the illegal (though perhaps unfortunately, he doesn't linger to spell out the evidence on point).

In the same vein, it's clear that he thinks Paulson/Bernanke/Geithner made horrendous mistakes in the eye of the cyclone but he is inclined to be charitable in light of the consideration that they were making decisions unprecedented in scope and scale, and under the worst sort of pressure.

But I think one telling way to get a handle on Blinder's approach is to consider his presentation of the persistent conflict between Geithner at Treasury and the independent-minded head of the FDIC, Sheila Bair.  Blinder pretty much comes down on the side  of Geithner.  Given his natural civility, he speaks with none of the angry intemperance we got from Geithner himself (and speaking of F-bombs...).  But he makes it clear: Bair's insistence that bank creditors (as distinct from depositors) take some of the hit--that insistence, per Blinder. jeopardized the functioning of the entire system.

Ever fair-minded, Blinder does, in effect, concede that it's a couinterfactual and one that (absent the discovery of an alternate parallel universe) we'll never be able to test completely.  Okay so far, but let me offer two reservations.  One, a little more nihilism, please.  If you really are not sure that Bair was wrong, why not say you're not sure Bair was wrong and leave it at that?  I don't see an urgent need to legitimatize a position (Geithner's) of which you are less than convinced yourself.  This might be just the time to mimic the questioner on "Says You" who likes to say "could be that...could be something else."

And two--for myself, I'd feel a lot more comfortable with Geithner's no-creditor-left-behind policy if I trusted his motives.  That is,  I think all the evidence compels the conclusion that Geithner was driven by an almost manic determination to please the banks.  In short, if he was right, I'd say it is for the wrong reason.  

There is a kind of an irony here.   People who wish to blackguard Geithner frequently brand him as a former banker.  Of course he was nothing of the sort: he is one regulator type who never worked for a bank a day in his life.  But of course, this in itself may be the problem: could it be precisely his status as an outsider on the ground, gazing up the treehouse with admiration and envy?--thereby so much more willing to prostrate himself before the bullies on the block?

You might almost call it a reverse of the Joe Kennedy system.  Recall the flac that FDR got when he sent Kennedy, the old fox, to mind the chicken coop at the SEC.  Recall how FDR blithely dismissed the critics with the insight that it Takes One to Know One--and recall how correct he turned out to be.  

No such risk with Geithner.  And precisely for that reason, I would have been grateful had Blinder treated him with a bit more cynicism/skepticism.  In short, perhaps, been a bit less polite.

1 comment:

Jimbo said...

Yeah, he was head of the NY Fed when all the fraud and robberies were occurring and it was just crickets from him and from Chris Cox, SEC Head who was W's henchman with orders to look away all the time.