Book review - After the Music Stopped: The financial crisis, the response and the work ahead

Alan Blinder is an economist. He was the author of the microeconomics textbook we used when I was an undergrad at the University of Texas. He is an unabashed Keynesian and generally leans just a bit to the left (but still squarely in the middle). His new book, After the Music Stopped, is a look at the economic catastrophe that we are still trying to get out way out of.

The book is a defense (generally) of the policies implemented by the Bush and Obama administrations in response to the economic collapse in 2007. He is a big fan of Fed chairman Ben Bernanke, a Bush appointee who still heads the bank. He also seems to have a soft spot for Timothy Geithner, at one time the head of the New York branch of the Fed and, later, Treasury secretary under President Obama.

Looking back at the economic collapse, Mr. Blinder blames the crash on bubbles in both the housing and bond markets. He decries the mortgages that were "designed to default" and on the mortgage-backed securities (and associated derivatives) that fueled the flames.

He defends the actions of the Bush administration when it came to bailing out Bear Stearns but questions the decision to allow Shearson Brothers to go into bankruptcy. He cheers the Fed's decisions to provide capital injections for the big banks and to bail out insurance giant AIG. He was in favor of the TARP program but didn't care for the way the head of the Treasury Department, Henry Paulson, under President Bush, went about spreading the money.

He argues that President Obama's fiscal stimulus plan didn't go far enough (not much argument there). He is a big fan of the so-called quantitative easing policy of the Fed (buying up longer-term debt in order to lower longer-term interest rates) since there's just so much one can do when the Fed's primary interest rate is already as low as it can go.

He is critical of the Bush administration's lack of oversight of financial markets and the exotic "investment" vehicles they created. He feels that derivatives should only be traded in regulated markets and that customized OTC (over-the-counter) derivatives should be done away with - as the more complicated a financial product is, the more likely someone's taking a bath.

He also offers a prescription for recovery and sustainability - get health care costs under control, rein in discretionary government spending and regulate the markets more effectively. His greatest concern is the looming tab for health care for the elderly. Of course the problem with health care costs is we subsidize the health care industry for its foregone profits in parts of the world with single-payer plans and whose people lack the funds to pay market price for prescriptions.

Yes, the book sounds very dry - but you'd be wrong. If you have any knowledge of , or interest in, economics, it's a pretty interesting book. It's not the definitive look at the economic collapse but it is a fair survey of the mess.

However, Mr. Blinder, much like his colleagues, can't seem to explain how everything went so bad in the first place. Yes, financial companies took a bath when folks started defaulting on their mortgages. The problems were multiplied because of the mortgage-backed securities that were sold and the manner in which the originator of the mortgage became completely divorced from the servicing of the mortgage. But what caused folks to default on their mortgages in the first place?

The underlying problem is the crisis of overproduction. As companies develop more efficient production methods, they are able to produce more products with fewer workers. Profits surge while wages stagnate. Some firms then take the next step and move production overseas where they can lower their wage expense even more. Profits surge higher and wages stagnate - or decline. So, while profits are soaring and the stock market is hitting record highs, more and more workers find themselves without work - or with the prospect of lower-wage jobs. The question then becomes how all of these products that are being made are going to get sold. As inventories increase because fewer and fewer people can afford to buy, workers get laid off and the problem worsens.

This is what causes the so-called business cycle. Overproduction precipitated the Great Depression. The financial crash on Wall Street merely served to worsen it. Overproduction led to the economic collapse in 2007, the financial crash merely served to worsen it. Now we are looking at a future with a higher unemployment rate and with fewer and fewer high-wage jobs. So, far all of Mr. Blinder's prescriptions to keep another economic collapse from happening, there is nothing that can be done to prevent it - a system of production designed to benefit the few at the expense of the many can never be fixed.