Every weekend for eight hours of nonfiction books and authors. We are in location at Princeton University in new jersey where we are interviewing a professor has written books. Now on your screen a familiar face and name to those in economic circles alan blinder who is a professor of economics former vice chair of the Federal Reserve as well. His most recent book, after the music stopped the financial crisis, the response and the work ahead. Professor blinder who caused the recession . Guest this is like one of those things, how long they offer an explanation . I think easter with a poco principle. It was thus and they ask mainly in this case people speculating on houses, people taking mortgages they knew her half fake couldnt afford and more sophisticated people. It that was the ordinary q. And then you have the allegedly more sophisticated people it turned out to the not so sophisticated who are at the other end of this food chain buying up the crazy securities that wall street builds on the crazy mortgages. The poco people, thats us, those that occur crazy mortgages. In between those two you have the banks. Mortgages alone there were two sides the borrower and the lender so theres one thing for people who are not watching properly for their own selfinterest and not being rational but the bankers were supposed to say now, you tell me you can pay a Market Studies equal to 100 of the market if of your house and im telling you you cant. So you have the bankers. Then the next step they are supposed to be bank regulators. The Federal Reserve is the most famous bank regulators. The Federal Reserve shares part of the plan but there were other bankers. Theres the officer of the comptroller of currency and fdic both should be watching the banks. There was the office of thrift supervision supposedly watching the savings and loan. That got abolished at the reforms after they did such a bad job. Congress Congress Said we are just going to get rid of it then then you had securities. The cftc and that may not forget the United States congress which did a few things of which i think the most egregious by far, really by far was passing the commodities futures modernization act in the year 2000. What did that do . All punch of things. Of no interest to most people but one thing of great interest was to literally banned the regulation which in the year 2000, once the do not enter sign for regulators was put up by congress in just grew. So there was a plethora of mistakes coming from everyone. I just advertise that last one. The absolute worst decision made along the way. Host so in your view the financial crisis of 2008 had its roots in the 2000 or if it is act. Guest one of the roots. Housley had a big fruit and a housing bubble. If we didnt have this big housing bubble derivatives, they go back. If we didnt have this big housing bubble these mortgagebacked securitiesbased on houses would have been better and safer. Do not delivered delivered its derivatives would have been better. Host what is a simplified definition . Guest the definition is very simple. The application is incredibly carbongate. Think of the word derivative, a derivative is a security that has no inherent value of its own but derives its value from the behavior of say the price of some other product. The simplest example of a derivative has been around for hundreds of years and is familiar with a lot of people but not everyone. Its stock options. I can buy an auction option on amazon. What that will do for me is leverage my pet on amazon stock. That is i will win if amazon stock goes up and by the way loose if it stock does not go down as well shareholders but my bet as an option holder will be leveraged. If i win a the multiple or lose in multiple of the Share Price Change in amazon stock, that was the essence of the problem. Well there were two essences. One is they typically embodied a lot of leverage. They magnify losses and it was great during the boom, sorry i said the wrong way. They magnify the gains and a magnifying colossus is horrible. The second thing is a lot of derivatives are a lot more complicated. The call option on amazon stock. Everybody in the Financial Market understands that. When you start doing derivatives on synthetic cds and things like that which all sounds like gibberish, even allegedly very sophisticated people didnt know. Host in your book after the music stopped you said the first order of business was to put into bubbles, right . Wrong. Why is that wrong . Guest because its too hard. Think of the government generally. This job is often pushed onto the Federal Reserve. People more broadly of the government somehow. First of all it has to recognize , so lets take housing. Were they bubbling in 2002, house prices . Well if we look back now probably not though a few people thought so. How bout 2004 . That was a little dicey. By 2006 it was clear. By the way not in every market. They were clearly way inflated to reasonable norm but then it was too late. The balloon was arctic white large and we didnt have a nice way to let the air out which takes me to the second part. So let the air out of a bubble. The analogy comes from bubblegum you blow it up and it pops. To stop or even to mitigate such a bubble you have to have well targeted instruments that will take a bubble down without taking the economy down. If you are the Federal Reserve you have interest. The Federal Reserve could have pushed Interest Rates way up which truly would have stopped the housing bubble in its tracks and also would have would stop the recession. I dont land the federal government. Did the Federal Reserve have any instrument he could have aimed at subprime mortgages and the derivatives on subprime mortgages . It didnt really have the right weapons. That doesnt mean there was nothing the Federal Reserve could have done or should have done but most of those would have could have for from the feds regulatory role. Tell the bankers to stop doing this. Husfelt professor blinder guest lots of people were yelling the sky was falling. I doubt that any of them knew how badly it would fall after but there were plenty of people issuing warnings. By then of course the housing bubble is sexy starting to go down. House prices are already following. It is by the way they didnt issue a warning. A lot of these mortgages were going to go bad if house prices went down. The securities that were built and were not going into default. He didnt have to be a genius to three the dash to see if things were going bad and would continue going bad for a while. Im not sure anyone realizes quite how bad and aside emphasize in this book among other things im not convinced were it not for the fateful decision that sent Lehman Brothers into bankruptcy it ever would have been as bad as it was. There are degrees of bad. It was going to be bad. Once this bubble was up there in all these crazy mortgages were out of derivatives were going to be big losses. But i dont think, you know you cant rerun history. I dont think it would have been as bad. How do programs like that help . Yes and probably yes. I dont mean to imply that every such Program Designed to backstop failing financial problems will work. We have a place called greece for example, where there have been a lot of programs that you could say havent worked very well. The government put, potentially 700 billion at risk. In fact, it only deployed at max about 450 billion. Isnt that still a lot of money . Yes it is a lot. They deployed that money fairly intelligently. Ill come back to that in a second. That doesnt mean they did everything exactly right. People were making seatofthepants judgments very fast. Clearly even the people who made the decision would probably go back on some of them and say well 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. Thats not exactly accurate because later on you may remember a part that was designed to save the Financial System, without getting into a lot of other purposes including the automobile area. You could argue about the automobile bailout. I think if you add up the benefits and what it costs us, it was a good deal deal to taxpayers, but it did lose money. The core mission was about banks and security firms and other things going on in the Financial Market and that actually turned a profit. It turned a prophet for the shareholders. So you have this deployment of federal firepower successfully does lloyd and it put money at risk, but in the end it didnt cost the taxpayers anything. How anybody can look at that set of facts and call the program of failure is beyond my comprehension. One of the phrases that came out of the 2008 financial crisis was too big to fail. What does that mean to you question what. So too big to fail was a doctrine that was round before the financial crisis. What what it basically means is this, if i draw an analogy, if you are in a neighborhood, lets suppose suppose there are a lot of stores, okay. If theres one great big building in the midst of the small stores and it catches fire , if you dont put out the fire, the whole neighborhood is probably going down. Thats the essence of the too big to fail doctrine. That there was some big institution, not only financial, general mount motors that i was just talking about is an example of a company, not a bank, that was rescued on the too big to fail doctrine. In the financial crisis they were mostly banks and investment banks. The notion was, despite all the bad and stupid things that bank acts might have done, and believe me there were a lot of stupid things done, we as a nation could not afford to let them fail because of the other institutions and households. Even some city and state governments that mightve gotten drag down with them, and so, according to the too big to fail doctrine, the state, the government must find some way to prevent the failure of institution acts. Now that could mean getting a merge with another bank, that could mean taking it over, the federal government taking it over, which is what we did with sandy mae and freddie mac. It could mean nationalizing the institution which was much the scuff in the United States, done to some extent in europe, but america doesnt like nationalizing things. There was a huge debate over this in the early weeks and months of the Obama Administration and the decision went, dont nationalize these banks, as several European Countries had done. But thats another way to prevent the failure. There were a variety theres another way which is just throw money at them. That is what this program was criticized of doing but the doctor and says, the doctrine doesnt prescribe the remedy but simply says its much too risky to let this giant institution fail. What was your experience light on the Federal Reserve from a 1994 1996 . First of all had nothing in common with any of those things we just talked about. There was almost zero bank failures. There were a couple i remember, they were so rare that they were big deals even if it was a Small Country Bank in nebraska, or Something Like that. We werent happy about that because we felt either the bank had done a bad job or we had done a bad job and bank shouldnt fail, but nobody even dreamt, in those years, of invoking be too big to fail doctrine because none of the banks that were big were systemic. We were focused then on a couple of things which we now call conventional monetary. Policy. Back then there was nothing called unconventional Monetary Policy. Back then it was conventional Monetary Policy. We met and decided what to do. We drove the Interest Rate toward a soft landing. That is what janet yellen is trying to do right now, give the economy another soft landing, but we did that actually and 95 96. We slow down the growth rate which had been quite high, just enough, not to cause a recession but just to land the economy at full employment and low inflation. Sounds simple. I dont know if it sounds simple or not, but its not easy. You have to to be good at what youre doing and lucky. Nothing bad can happen as youre doing this landing, but we did that and we were pretty proud of that. It made the Monetary Policy job, by the way, quite easy for years after that. The economy was kind of in a placid position just where it was supposed to be. In fact after i left the fed in early 96, the fed didnt touch Interest Rates for almost two years or something. It just got to a soft landing and lets just leave it there. The fed has kept Interest Rates very low. Is that positive for our economy . Oh yes. If we go back to what i just said, the principles of conventional Monetary Policy are if the economy is weak it needs to be stimulated, you lower Interest Rates. If the economy is overheating you raise Interest Rates. So take that through recent years, years, the economy has been weak for years and years and years so that says lower Interest Rates. You get bottled up at zero. The central Interest Rate that the fed controls is the interbank lending rate. Except under very weird circumstances, it cant go negative. So the fed actually brought it down in the wake of this crisis to where it started before the crisis which was five 1 4 . People forget that now. Five and a quarter down to virtually zero. Thats a big trip that number has been there ever since 2008. Thats a long time. The discussion going on both inside the fed and around the fed by fed watchers and others are precisely now focused on when will the fed lift off of zero . Another way of saying that is, the right way of saving that is when will the fed judge that the economy is Strong Enough that it can start normalizing Interest Rates . So far the fed has decided not yet. Two final questions. In your book, after the music stopped, you talked about basis points. What exactly is a basis point . Thats a jargon word. Sorry. I try to stay away from jargon as much as i can. Its 1100th of a basis point. So 1 is called by financial people 100 basis points. 2 is called 200 basis 200 basis points. Thats all. The subtitle of the book in the financial response in the work ahead, lets focus on the work ahead. What would you like to see done . Some of it has been done. We needed a substantial reform of the Financial System which in part we got from the dodd frank act in 2010. Among many, many many, many things, it was very copper intensive. To take us back where we began, he reversed the horrible decision in the modernization act that it should not be regulated and they now are. It also did many, many other things. We needed our comprehensive financial regulation. If you now think ahead, ironically, the job i see is to defend dodd frank. Dodd frank is under vigorous and in some dimensions successful attack from the financial industry which is trying to push this, what they consider overregulation, away. This will be a battle a battle that will go on for at least a next year or two if not longer. There are a few things in financial reform that were not done in dodd frank, so we havent figured out what to do with fannie mae and freddie mac, the housing businesses. I said we didnt nationalize companies, but we sort of nationalize them. They were half government anyway. They are still in that state of purgatory. We havent figured out what to do with them. We need to figure that out. We have not fixed the Rating Agency problem. We havent talked about that, but none of the i rattled off a bunch of guilty parties earlier but i left off the rating parties which left a lot of these complicated and largely horrific securities with aaa ratings which means safe enough to recommend to grandma. They were not. That problem has not been fixed. There is work there. A huge problem we were talking about was the horrible mortgages that were granted. Thats a lot better now. You can start seeing crummy mortgages creep back and we have to watch that and supervise, the government needs to supervise the banks better than it has before and dodd frank mandate that. The whole system has deleverage. We have all this debt where we started with the culprits. Households have too much debts,s banks and security firms with too much leverage. That all looks much better than than it did. The other job, when i wrote this book that was still part of the work ahead but we just now didnt do it and it mostly cured it self was the tsunami of foreclosures. When the housing bubble burst and all these mortgages can be repaid and there were so money households underwater, it was very clear that a lot of people could 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 we get to 2015, most of that is over. Not all of it but most of it. Its too late to fix that problem. Youre watching tv on cspan2 thank you to alan blinder. Thank you. Cspan takes you on the road to the white house and into the classroom. This year our student cam documentary contest asked students to tell us what issues they want to hear from the president ial candidates. Follow cspans road to the white house coverage and get all the details about our student cam contest at cspan. Org. Now on book tvs after words, former Federal Reserve chairman amber nagy discusses his book the courage to ask. He recounts the 2008 crisis and recounts the steps taken to revise the economy. Hes interviewed by the Ranking Member of the senate houston ranking affairs committee. Mr. Chairman nice to be with you. Thank you. Impressive work. You began by showing up at work in kissing it to buy. You began to write this impressive work. It was impressive and recall