The current financial and economic crisis that began in 2008 and that, in my opinion, hasn't seen its last down leg will be written about for decades to come, and so no single book should be regarded as the final word. Such a complex, devastating, and multifaceted event is probably too complicated for one person to understand, and so a variety of viewpoints should be sought out. While I'm no expert on the whole matter, either as regards theoretical issues impacting the event or empirical evidence supporting one or another theory, I have read a few books about the crisis and can at least say that I've reached a point where I can identify what makes sense and what doesn't (at least to me). Alan Blinder's book is probably one of the better books I've read by what I consider establishment economists (those who work at a major university, have had extensive high-level experience in government, or basically support a Keynesian approach to economics). I confess that, despite my best attempts to approach all books without prior judgment, I expected to like the book a lot less than I did.
To his credit, Blinder is critical of virtually all the major culprits, though he is rather soft in his criticisms of the Federal Reserve (the Fed)and the federal government. He tends to minimize the role that the Fed had in creating the crisis in the first place. This is not surprising for a former high-ranking Fed official. In addition, he seems to relegate moral hazard to a secondary or even tertiary cause or factor in the crisis, whereas I think it plays a primary role, not just because of the recent bailouts but because of the message that has been conveyed for several decades by the Fed that the big banks and their profits will always be safe. I believe this is one of the main reasons why executives and other workers at large financial firms are given such huge bonuses: they know they'll be bailed out if things get really ugly, so why keep the cash on hand. The executives themselves may not understand this at a conscious level, but the Fed's message over the decades has been clear. Indeed, The Creature from Jekyll Island: A Second Look at the Federal Reserve makes a pretty good case that one of the main reasons the Fed was founded in the first place was to ensure profits for the big banks. And after the rescue of, I think, Continental Illinois bank in the 1980s, that book cites none other than former Fed chairman Paul Volcker as saying that saving the big banks was one of the main reasons the Fed was created.
Blinder cites some facts that did, I admit, surprise me. For example, in the end TARP (Trouble Assets Relief Program) netted a small profit for the American taxpayer. In addition, he suggests that the Fed's keeping interest rates so low for so long can't be a main cause of the housing bubble since England, for example, also had a housing bubble in the midst of interest-rate increases by that country's central bank. Such facts did, as I said, surprise me. At this point, I don't know what to make of them, except that they do seem to poke a hole in some criticisms of low interest rates advanced by libertarian economists/thinkers. Until I read Blinder's book, I had bought into those criticisms.
However, I don't believe Blinder is a big-picture kind of thinker. I say this because he looks for the causes of the current crisis in more recent events and doesn't seem to give much thought to the cumulative effects of certain policies. For example, what have the effects been of taking the U.S. off the gold standard, as a first step by FDR and then definitively by Nixon in 1971? By severing the link between gold and the dollar, Nixon unleashed forces that could ultimately lead to the complete devaluation of the dollar. After all, the average lifespan of fiat currencies (and why should they die at all?) is around 100 years. Look at a chart of the dollar. It starts losing serious value around 1898 when we entered the Spanish American war and then continues its irrevocable and earnest decline after 1913, the year the Fed was founded. Doesn't look like a good record of fighting inflation to me. What are the effects of Fed policies over the past century? Blinder doesn't address this issue.
Blinder also doesn't address the issue of what it means to have the world's de facto reserve currency as the U.S. does, what that has meant for Americans' standard of living, and what losing that status could mean for us in the future. Likewise, Blinder doesn't look at legislation, such as the Community Reinvestment Act of 1977, that undoubtedly led to the housing bubble in the early to mid-2000s. That legislation, together with a report from the Federal Reserve Bank of Boston in 1992 that suggested that lending policies of banks were inherently racist, coupled with threats by the Clinton Justice Department to file suit against lenders who evinced race-based lending policies (the report was later shown to be based on flimsy evidence), directly contributed to the run-up in housing prices, but Blinder does not even mention it. He must be aware of it, but for whatever reason, it doesn't fall within his radar. Another major issue completely ignored by Blinder is a central feature of our banking system: fractional reserve banking (FRB). The long-term, cumulative effects of fractional reserves are truly perverse; personally, I see no difference between FRB and counterfeiting. However, the effects of FRB are long term and so take a while to be felt. Finally is the inflation threat. Blinder seems to believe government statistics on inflation that show it to be minimal. But, as John Williams at ShadowStats has shown, government inflation models of today are not what they were in the 1980s, which weren't what they were in the first half of the 20th century. If they were, then the government would be showing inflation running at a much higher rate than it currently reports. I don't know if Blinder is deliberately skipping over Williams' work, but he doesn't question government-derived statistics on inflation (or unemployment).
Where Blinder is most at odds with my way of thinking is in his prescriptions for dealing with the situation. After arguing that one of the factors that contributed to the financial crisis was a lack of enforcement of regulation (regulation that was already in place), Blinder advocates more regulation, without explaining how that regulation would have any better chance of being enforced than the regulations that supposedly would have mollified the effects of the current crisis had they been enforced. When Harry Markopoulos, author of No One Would Listen: A True Financial Thriller, first notified the Federal Reserve about Bernie Madoff's Ponzi scheme, there was already enough regulation in place to stop Madoff in his tracks, and his investors would have lost only $3 billion at that point. By the time regulators got around to enforcing the law, Madoff had $50 billion in investors' money. Thus, the problem was not with a lack of regulation but a lack of enforcement. Blinder doesn't explain how new regulation would necessarily be enforced.
One minor aspect of the book I had a problem with was the style. Blinder tries to combine a scholarly, learned tone (and he is clearly at ease with his subject matter - a big plus of the book) with a chummy, colloquial one. Sometimes this grated on my nerves, and in one instance it makes Blinder look rather foolish. The title of Chapter 8 is "Stimulus, Stimulus, Wherefore Art Thou, Stimulus," an obvious echo of Juliet's "Oh Romeo, Romeo, wherefore art thou Romeo" from Shakespeare's "Romeo and Juliet." The first thing to note here is that in the original, there is no comma before the last "Romeo" because Juliet is not talking to Romeo; it's a monologue. The second, and more important, thing to note is that "wherefore" is an archaic word that means "why," not "where." Juliet is saying "Why does your name have to be Montague" (of all families in the world, why do you have to be the son of my father's mortal enemy?)? Blinder's use of "wherefore" thus makes no sense. I think he meant to say "stimulus, stimulus, where are you," because so far, the stimulus that the government promised hasn't materialized, but he seems to be ignorant of the real meaning of "wherefore." (Doesn't Blinder have any friends in the English Department at Princeton?) It's a minor point, I know, but it makes Blinder's attempt at showing off his erudition look silly.
All in all, I consider this book a worthwhile read, though by no means the final word. The bibliography and notes are also very good. However, Blinder seems (forgive me) blind to his own underlying assumptions, and if you don't know that it's possible to look at some very basic issues very differently from how Blinder regards them, you might not understand that Blinder is making an assumption at all but just stating the facts. But Blinder's general view is along the lines of the dominant one in the media and in policy circles, so it is likely to be praised as clear and even-handed, even wise. I recommend reading it alongside other books, though, for a broader understanding of the ongoing financial and economic crisis.