And that this booktv on cspan2. Ever we two. Every weekend, 48 hours of books and authors. We are on location at Princeton University where we are interviewing professors to out also written books appeared now on your screen a familiar face and name to those in economic circles. This is alan blinder, professor of economics, former vice chair of the Federal Reserve as well. His most recent book after the music stopped. Professor blinder, who caused the recession . S. Know this is one of those things like how long do you have for next donation. If you think you start with the poco principle. It was asked. The acid mainly in this case people speculating on how those people taking mortgages, new or have knew they couldnt afford. More sophisticated people. That was ordinary people. Then you had the allegedly more sophisticated people that turned out not to be so sophisticated that the other end of this food chain buying up the crazy securities that wall street builds on the crazy mortgage. So the poco people, those are the crazy mortgages. In between, you have the banks mortgage is a long two sides, borrower and lender. It is one thing if people were not watching out properly for their own selfinterest or you could say not behaving nationally. The bankers were supposed to be saying no. You tell me you can pay a mortgage equal to 100 of the value of your house and theyre supposed to say im telling you you cant and im not lending it. So you have the bankers. Next up they are supposed to be Bank Regulators. The Federal Reserve is the most famous of those Bank Regulators and as you mention, i was once in politics with the Federal Reserve. There were other Bank Regulators the fdic is not just an insurance company. Supposed to be watching the banks. There is the office of thrift supervision supposedly watching the savings and loans. Back out after the reforms after they did such a bad job they said we are just going to get rid of them. Then you had security regulators of the fcc and the cftc and let me not forget the United States congress commotion a few things which i think the most egregious by far really by far was passing the commodities future modernization act. I love this word uttered a station i in the year 2000. A whole bunch of things have no interest to people like you are in the commodities business. One thing of great interest which literally bands the regulation of derivatives. Year 2000 was this big haired ones that do not enter sign for regulators was put up by congress, it just grew like topsy. So there is a plethora of mistakes coming from everybody. I emphasize the last one because if i had to pick it nice to receive the absolute worst decision made along the way that would probably be a period so interview the financial crisis of 2008 had its roots in the 2000 derivatives act . One of the roots. Obviously in the housing bubble. If we didnt have the big housing bubble, the derivatives let me go back. If we didnt have the big housing bubble, the mortgagebacked securities based on houses would have been better and safer. Then the derivatives built on them wouldve been better and safer and so on. So there are multiple routes of which the crazy derivatives were certainly one. Host what is a simplified definition of a derivative . Guest the definition is actually very simple. The application can be incredibly complicated. Think of the were derivative. A derivative is a security that has no inherent value of a cell but derives its value from the behavior of some other security. Host simplest definition of a derivative thats been out for a hundred years and has been familiar for everybody as a stock option. I can buy a call option on amazon stock. But that will do for me is leverage my bag on amazon stock. I will when amazon stock goes up and lose its amazon stock goes down acyl shareholders. My bet as an option holder will be leveraged. I will when a multiple or lose a multiple of the Share Price Change in amazon stock. That was the essence of the problem. There were two essences. One was this one. They typically embody a lot of leverage. They magnified the loss, which is great during the boom. Sorry i said at the wrong way. They magnified the games, which is great during the boom. They magnified the loss, which is horrible during the bust. Second thing is a lot of the derivatives are about more complicated than what i described. I used a real example. Call option on amazon stock. Everyone in the Financial Market understands what that means. When you start doing derivatives on synthetic cds in things like that which all sounds like generation turns out to be gibberish even allegedly very sophisticated investors who churned out didnt know what they were buying. Host in your book, after the music stopped, the firstorder business was to put an end to bubbles, right . Wrong. Why is that wrong . Guest because it is too hard. Think of a government generally. This job is often pushed on the Federal Reserve. Just think more broadly of the government somehow going to stop or mitigate a bubble appeared first of all they have to recognize the bubble appeared so lets take houses. With a bubble in 2002 . I say let back, probably not though a few people thought so. How about 2004 . That gets a little dicey. You could say yes. You could say no. By 2006 it was clear. By the way not every market in the United States were clearly way inflated relative to any reasonable norm. But then it was too late. The balloon was already quite large and we didnt have a nice way to let the air out which takes me to the second part of why this is too hard a job. To let the air out of a a bubble. The analogy comes from bubble gum which tends to go splat on your face once you blow it up too far. To stop or even to mitigate such a bubble, you have to have some well targeted instruments that will take the bubble down without taking the economy down. So if youre in the Federal Reserve u. S. Interest rates. The Federal Reserve could have pushed Interest Rates way up which surely wouldve stopped the housing bubble and other bubbles in his tracks. Also cause a recession for sure. I dont blame the Federal Reserve for not doing that. And the Federal Reserve have any instrument he could have aimed to subprime mortgages and the derivatives built on subprime mortgages . I dont think so. It didnt really have the right weapons at its disposal. That doesnt mean there is nothing the Federal Reserve could have done or should have done, but most of those were from the feds regulatory role as everything a few minutes ago. Told the bankers to stop doing that rather than their Monetary Policy. Host professor blinder was anyone yelling the sky is falling . Guest by the time you got to september 2008 lots of people were yelling the sky was falling. I doubt any of them knew how badly it would fall after. But there are plenty of people issuing warnings. By then the housing bubble it is actually starting to go down by 2008. House prices already falling. That is why you didnt have to be that smart to start issue warnings because a lot of the mortgages were going to go bad if house prices went down. People would not refinance it. The securities therefore built on his mortgages will start going into default. He didnt have to be a genius in 2008 to see things were going bad and we are going to continue going bad for a while. Im not sure anyone realized quite how bad. As i emphasize in the book among other things, i am not convinced were it not for the fateful decision that sent Lehman Brothers to Bankruptcy Court it up for wouldve been as bad as it was. There are degrees of bad. It was going to be bad. Once the bubble was up there in the crazy mortgages existed and derivatives existed, there were going to be big losses. But i dont think you cant rerun history. I dont think it would have been as bad without this decision to send the man to Bankruptcy Court. Popular question by the way not the one you asked was anyone calling this correctly in 2005 . They are the answer is maybe. You can find snippets of writing for this and that person including my colleague at princeton, paul krugman who is yelling in 2005 getting into big trouble. It was in a huge number of people and the people that were yelling were being called party s and skunks at the garden party. The masters of the universe were sharing paying attention. Postcode did carp work and do programs like that help . Guest gas and probably. I dont mean to imply every such Program Designed to backstab the failing Financial System is going to work. We have across the ocean in a place called greece where there have been a lot of programs you could say her second cousins that dont seem to have worked very well. The answer is very easy. The government put potential a 700 billion at risk. In fact, it only deployed about 450. Some people are saying this and thats a lot of money . Yes, it is a lot of money. It deployed that fairly intelligently. That doesnt mean they did everything exactly right. People are making seatofthepants judgments very fast. Clearly even the people that made the decisions would go back on some of them and say i wouldve done that differently. By and large the money was deployed intelligently and in the end the taxpayer didnt lose a penny. Footnote to that. That is not exactly accurate because later on you may remember t. A. R. P. Which was designed to save the Financial System started getting used for a whole lot of other purposes including the automobile bailout. You can argue about the automobile bailout. If you total the costs and benefits of what it achieved in cost as it was a good deal for taxpayers. They did lose money and that was taken out of t. A. R. P. The coronation of t. A. R. P. Was about banks and securities firms and other things going on in the Financial Market and not actually turned a profit for their shareholders. So you have the deployment of federal financial firepower effectively deployed, putting money at risk for sure, but in the end not costing taxpayers a nickel and in fact turning a profit for the taxpayer. How anybody can look at the set of facts and call it a failure although people do is beyond my comprehension. Host one of the phrases that came out of the two guys in a financial crisis was too big to fail. What does that mean to you . Guest too big to fail is keen to great prominence in the financial crisis. It basically means that by john analogy if youre in a neighborhood, but suppose theres a lot of stores and there is one great big building in the midst of these stores and it catches fire. If you dont put up a fire, the world neighborhood is probably going down. Thats the essence of the too big to fail. There are some big institutions. By the way, not only financial. General motors is an example of a company, not a bank rest it on too big to fail. But in the financial crisis they were mostly banks. The notion was despite all the bad and names they might have died and believe me there were a lot we asked the nation could not afford to let them fail because of the other institutions in households and even sin city and state governments that mightve got dragged down with them. According to the too big to fail doctrine the government must find some way to prevent the failure of institution acts. That could mean getting emerge to another bank. That is what weve done with bear stearns, for example. That could mean taking it over, the federal government taken over by which is what we did with fannie mae and freddie mac. It could be nationalizing which is the institution much discussed in the United States done to some extent in europe. Americans dont like nationalizing things. There was a huge debate in the early weeks and months of the Obama Administration and the decision went dont nationalize these banks as several European Countries have done. But that is another way to prevent the failure. Theres another way of another way of course which is throw money at them, which is what t. A. R. P. Was criticizing doing. The doctrine doesnt prescribe a remedy but simply says it is much too risky to that this giant institution fail. Host what was your experience like on the Federal Reserve . Guest fortunately first of all it had nothing in common with any of the things we just talked about. They were almost zero big failures. They were so rare that they were big deal to those a Small Country Bank in nebraska we were happy about that because he thought either the banker had done a bad job or we had done a bad job and banks shouldnt fail. Nobody even dreamt in those years of invoking the too big to fail doctrine because none of the banks that were big worry systemic threat. We were focused than on a couple of things, but principally what we now call convention. Act then there is no such thing as unconventional Monetary Policy which ben bernanke used almost every day of his life. We met and decided what to do about Interest Rates to steer the economy towards what was called bad and still called the soft landing. By the way this is interesting because that is what janet yellin and the site are now trying to do. But we did that in 95 96. We slow down the growth rate which had been quite high, just enough not to pose a recession, the justly in the economy at full employment with very low inflation. It sounds simple. I dont know if its not simple or not. It is not easy. You have to be good at what you are doing and lucky that nothing bad happens as you are doing this landing. But we did that and were pretty proud of that. And if the Monetary Policy job by the way quite easy for years after that. It is in the position just very supposed to be. After a left in early 96 trying to remember now, they didnt touch Interest Rates for almost two years. We got the soft landing. Lusciously that they are. Host the fed has kept Interest Rates very low. A positive for our economy . Guest oh yeah. If i go back to what i just said the principles of conventional Monetary Policy hurt the economy is weak and needs to be stimulated to lower Interest Rates. The economy is overheated late raise Interest Rates. The economies have been weak for years and years. Thats a lower Interest Rate. You get all that big zero. The central Interest Rate the fed controls is called the federal funds rate except under very weird circumstances they cant go negative. The fed brought it down in the wake of this crisis from where it started before the crisis which was five and one quarter . People forget that now. Down to virtually zero. The fed reached that means zero number in december 2008 and has been there ever since. The discussions going on both inside the sad and around the fed by fed watchers and others are precisely focused on when will the fed lift off of zero. Another way of saying not, the right way of saying that, when will the fed judge the economy is Strong Enough that it can start normalizing Interest Rates. So far the fed has decided not yet. Host alan blinder, two final questions. In your book trained re you talk about basis points. What exactly is a basis point . Guest thats basically a jargon word. It is 1100th of a basis point. So 1 is called by financial people basis points. 2 to 200 basis points. That is all. Host subtitle lets focus on the work ahead. Guest well, some of it has been done. We needed a substantial reform of the Financial System, which in part because from the dog drink act in 2010. Of many, many things, it touched a lot of things just to take us back where we begin the conversation. They reversed a horrible decision in the commodity futures modernization act that derivative should not be regulated. It also did many other things. So we made our comprehensive financial regulation. If you now think i had ironically the job i see is to defend sub six. Is under vigorous and some to mention successful attack from the financial industry which is trying to push this overregulation. So this is going to be a battle that will go on for the next year or two if not longer. There were a few things and financial reform that were not done in doddfrank. We havent figured out what to do with fannie mae and freddie mac, the housing businesses. We didnt nationalize companies but we sort of nationalize fannie mae and freddie mac. They were half government anyway and they are still in that state of purgatory. We need to figure that out. We havent talked about that. I rattled off at the beginning a bunch of guilty parties. I left out the rating each of these, which left a lot of these complicated and largely horrific securities with triplea ratings, which means safe enough to recommend to grandma. They werent and that problem has not been fixed. There was work there. A huge problem were talking about earlier was so horrible mortgages that were granted. Thats a lot better now although you could start seeing crummy mortgages starting to creep back as the memory fades. We have to watch that. We have to supervise the government is to supervise the banks better than i had before in doddfrank mandates that. The whole system has to leverage. We had all of this data was started without corporate households. Big sur to leverage, security firms are to leverage, et cetera. That all looks much, much better now than it did. That was part of the work that had to be done. The other job when i wrote this book is still part of the work ahead, but we just didnt do it in a mostly cured of itself was the tsunami of foreclosures. When the housing bubble burst and all these mortgages couldnt be repaid them with so many households under water, it was very clear a lot of people will lose their houses. To me its a crying shame the government didnt do more to prevent that. But it didnt and that is mostly over by now. The bubble burst in 2008 2009. By the time you get to 2015, most of it is over. It is too late to figure that problem. Postcode you are watching booktv on cspan2. We been talking with instant economics professor, alan blinder. Guest thank you. Postcode now joining us on booktv, tracy k. Smith, it was surprise winner and she has written a memoir called ordinary light. Professor smith, who is kathy . Guest kathy is my mother. Thinking about this book, i realized the person i grew up knowing, its probably such an obvious statement. One of my main wishes and wanted to write about my mother was to explore the impact of her dad on my life explore our relationship, think about the different versions of myself that i was with and without her. I also had the really stern whitish to bring her to life for many children who were born after she was gone. It just struck me as heartbreaking when i was pregnant with my daughter who is now five that she would never know this person. One night i was laying in bed in my husband said when she read a book about your parents, a book that will tell her who they were. I had such a feeling of anxiousness and fear at the past that i knew thats exactly what i needed to do. The book became a lot more than that. He became a story figuring out who i was and who i have been. Some of the largest discoveries that a reader or my daughter might make her about her mother. Host one of the things i got out of ordinary light were the differences between you and your mother and your experiences growing up africanamerican in the United States. Guest right. The generational differences is one really big marker that determined a different set of experiences she had growing up in the south in the 30s and 40s and 50s and i growing up in california and massachusetts in the 70s, 80s, 90s. When i was a child, i had a hard time framing questions i had about her experience into words. I knew there was a huge piece of African American history that contained pain and that my pairings have been experiencing that and it hurt me to think about that. The whole segment of my life that kind of shied away from it. I remember learning about the Civil Rights Movement in grade school and seen images of people the National Guard and feeling so worried richer actively for the people in my family and the way that i chose to do with it as a child was simply to back away from it and allow silent to create a kind of affair. I wanted to write into the silence in the book as well and find ways of interrogating the anxiety i had and also coming closer to maybe a kind of empathy with my parents and their parents and the experiences they would have been dealing with this young adults in the u. S. During a time when racial tension and racial violence were a tremendous high. Thinking about the difference between then and now i am very saddened about the fact it is not as vastly different. There is a section in the memoir where i remember a story that i was told about her great uncle are great, great uncle who had been murdered by a white man