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When the Crisis Was at Crescendo

Alan S. Blinder is said to be a potential successor to Federal Reserve Chairman Ben S. Bernanke, whose term expires in January. Blinderís ďAfter the Music Stopped: The Financial Crisis, The Response, and the Work AheadĒ reads like a blueprint to avoid commitments at any confirmation hearing.

Keeping oneís options open might be useful at the Fed, and the country might benefit in the end. But going into the fifth year of Fed deployment of tools and power that few knew the central bank had (and some wish it didnít), a reader would like a former Fed vice chairman and a Princeton economics professor to be more direct about the choices the next Fed chairman will face, many of them the result of decisions made by the current chairman.

Blinder gives the Fed and other government agents high marks for dealing with the past crisis but isnít helpful about how a future Fed would cope with the next one now that Congress has curtailed its powers, as well as the Treasuryís. Blinder is right that bubbles are hard to recognize as they build, but arenít university professors supposed to look back and identify some markers that will help next time? ďGreedy bankersĒ ó Blinderís term ó deserve only a share of the blame for the crisis, he says, and then lists seven causes with a common ingredient most readers will spot: bankers.

Hindsight is 20-20, but Blinder seems to think itís therefore unsporting to use it. Thatís a shame because ďAfter the Music StoppedĒ is gripping reading, quite an achievement for a recap of events that are starting to recede from memory. Some members of Congress are already showing signs they have forgotten the chain of events set off by the collapse of Lehman Brothers, the dangers posed by a barely noticed foreign office of a barely regulated U.S. insurance company, and a run on money market funds.

They should read Blinderís Chapter 6 about September 2008, especially the week beginning Sept. 15: Lehman fell. The Fed effectively nationalized insurance company AIG because the unsupervised activities of the companyís London financial products business created a massive risk for its counterparties. Investors fled from money market funds. Morgan Stanley and Goldman Sachs applied to become banks under the Fedís regulatory scrutiny and, more important, its rescue operation.

Whatís striking is the speed at which things were unfolding and forcing the Fed, the Treasury and other regulatory agencies to make momentous decisions. Any one of a series of events posed a grave danger to the system. Coming at a rapid-fire pace, they collectively could have overwhelmed the ability to respond. But even as they were dodging the systemic bullets, officials by and large worked purposefully toward the right outcome. Bernanke has earned his retirement.

Blinderís clarity about the choices faced and the risks ó legal, political and economic ó of action or inaction is what make his book compelling. He slows down the thinking, giving it a coherence that wasnít always apparent at the time. If there is a ďeurekaĒ moment in the response to the crisis, itís when officials make the transition from dealing with troubled institutions to dealing with troubled markets.

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