Jan 29, 2013|
Former Vice Chairman of the Federal Reserve Board Alan Blinder and author of After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead
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Alan Blinder is the former vice chairman of the Federal Reserve board and he's the author of the new book. After the music stopped the financial crisis the response and the work still to be done ahead. Good morning professor welcome to the show. We appreciate your time -- in retrospect now you've had time to study the financial crisis of 2008. Did the United States -- are we did Wall Street caused the near collapse of the global economy. Well yes I wouldn't stated get a bunch of samples up you know we all of the little -- goal line that the enemy was -- We have this huge housing bubble and Wall Street could not a manufactured by itself. But what Wall Street did it. With the Wall Street and the banks double the old street. Is built on top of that housing bubble especially the sub prime part. They. -- a whole host of derivatives -- securities that have really existed before. That may or a much bigger financial ball -- barely mortgages. Can you give us an example because I think we all know and have heard stories about how people. You know that they called them the ninja loans right no income no job no assets people bought a house for in with no money down. But can you give us an example of some of these you know he called them derivatives and and other complex financial products. -- give us an example of of how those were manufactured. Bullets started with. DO what's called the CDO collateralized debt obligations what was that doubles so highly of these various mortgages. Into it back. From and then selling off like like placing the salami. Postal people took the bottom lights which colorfully got called later the toxic waste. That was where all the risk was supposed to -- and that there were others that you got all the way to the top which Gupta particulate Spain by the way. Super senior. As if you know this is so they if you could that your life. Hopefully nobody did -- like a lot of people did that money. -- That ordering was -- and though many were predicated on the notion based on recent history that default rate on mortgages would never be that. But what you got at the bottom of this Alabi. Sub prime mortgages injury alone liar alone the better etc. You've created a very risky. Structure. You know you have you went for the life of me -- I've never understood how that was not illegal. -- they -- your your college professor -- just like common sense would tell you that should be against the law how what it's like it how was that not a legal. Well the people in the industry will will say and assumptions to it although you know you could -- to stretch it. That these were being sold to sophisticated investors with transparency. So people do what they were buying it's not illegal but people take risks. Financial market and we certainly don't want to but he -- And -- Tibet but it is also true in the fact that. Really a lot of the buyers didn't know what they were buying they would -- led by the AAA -- -- that was put a bomb. Some especially those -- procedures that is just. Referring to was that there was no risk. Whatsoever and even. -- of wall -- themselves as evidenced by the fact that how -- really need that at the end really I don't think fully understood. What the world they were. That rate it's that's scary it. He has anything been done since then to clean this up to make sure it doesn't happen again I mean. I I've I've studied Dodd-Frank but I have to tell yeah I don't fully understand it. Sure well it's plenty 390 page so I don't do. One important thing it's been about frank you know Iowa -- they discuss why should the the government at the -- for the banks that indicate. 01 title of dot franks is all about safety Atlantic. It's meant to make sure that it alone liar loans boat dock loans etc. ever happen again. Now that can even be necessary to write in the law but apparently it was. So I think it appeal and coupled that with these frightening experience that allowed these banks went through that at least for a while we have some. Security I don't -- a -- insurance because it's not sure it's. But some security that nothing like this will happen again soon bit bigger here of course is it'll pop ups the. Have you noticed that none of the politicians involved have taken any accountability for this at all you know I think in about. You know the good people that were involved in Fannie Mae and Freddie Mac. Let there be Barney Frank whether it be George Bush right he he wanted to inspire homeownership. None of them really said oh yeah -- you know what I'm I'm I screwed up and and again they keep you talked to Barney Frank he denies any culpability associate with this act at all. Electing politicians don't really want you know that's something you want to get in there and have the cameras rolling and take credit for I can -- bridge got built the new congressional district. -- opposite practiced a little bit you know even to rescue the rescue that got us that this was very well -- but you don't see. Up politicians. Like you don't even see the -- secretary of the treasury. Would -- a bit. Trying to claim credit. Second and ten all right. -- Hank Paulson deserves an awful lot of credit doesn't. I think they both do. All that was sitting in the hot seat when the explosion. Everybody go -- into the air and tactical unit to make some mistakes and have criticized the order the book. But by and large. The policy that he put through especially the part -- people think the capital on a program that bush. Tell us about that did tell us about TARP remind us a -- of how we really averted this global depression that we could have gone into it could have been. 2535%. Unemployment. I -- so. Part stood for -- put stamps were troubled asset relief probe of the original idea. Was that. The markets for these mortgages and securities based on mortgages which as you've just been speaking about. Have moralists ceased functioning. So you couldn't buy and sell any thing -- there was no market development that mortgage that it was basically. Dry up or had. Dried up so the idea was to buy troubled assets -- push up their price at re create a market where they used to be a market but a whole lot. Of what those things that I believe we'll but the -- the ball -- Was that that was never got the part. Right at the beginning of the -- he decided it was better deploy it. To buy stock in banks -- by infusing more capital into the banks because the banks were really short. On capitol. And it's not that I think that was a bad thing to do or say. But I think forgetting about buying the troubled asset. What's at stake and politically or aviation public relations. Why is it gave the park but terrible bait and switch. Appearance. He went down with Ben Bernanke asking congress to appropriate huge amount of money to buy troubled that that. And then within days he was saying we're not buying and truck. That looked -- bet a lot of people. -- a decade to because the big boys got bailed out though and the little guy lost his house Bryant got out. -- that was the other big problem like a peep about this is how much we did for the financial bailout what was necessary. But how little we did to bail out homeowners network -- -- Terrible position. Professor I know you have to run but I'd love to have you back because my big concern is could this happen again. And I know you address in your book so I'll I'll talk to your your publicists and see if you can come back and help us out some more. -- -- be great thank you very much. Thank you professor. That's professor Alan Blinder -- former vice chairman of the Federal Reserve board. Author of the book you need to read this book if you're if if you're a history buff like I am read the book it's fascinating now because I lived through this crisis. It's called after the music stopped now -- professor Alan Blinder. From the Princeton university and -- use of former vice chair at the Federal Reserve. And that the the thing that it's scary June news about all -- I'm not sure could happen again. You know again I'm not sure why would it. You know I I felt better knowing that I'm not the only guy they didn't fully understand Dodd-Frank. 2300 pages long. You know Heidi -- understandably -- and less time to read it -- like memorizing worn piece right right right it's a pretty hard to do. They we're gonna talk in the next say or talk about the Museum of Science. Here they're they're gonna open a new gallery at the analysts so we'll talk about that when we come back on the financial exchange.