BROOKE GLADSTONE: Ten years on, there's been a lot of analysis of the financial crisis but understanding, not so much. In 2012, the MIT economist Andrew Lo published a paper called “Reading About the Financial Crisis: A Twenty-One Book Review" in which he discovered that nobody -- not academics, not journalists, not former Treasury Secretary Hank Paulson -- could agree on what really caused it. No agreement but plenty of conflicting narratives and prescriptions. Mark Blyth is a professor of international political economy at Brown University. Welcome back.
MARK BLYTH: Always a pleasure.
BROOKE GLADSTONE: So my first question involves a kind of lightning round of putative causes that are popular among different groups for different reasons. Let's go through them. Are you ready?
MARK BLYTH: Let’s go, let’s play the game.
BROOKE GLADSTONE: The financial crisis was caused by handing out subprime mortgages to unreliable would-be householders.
WOMAN: People who, frankly, you know, made bad decisions.
MAN: Took out mortgages they couldn’t afford to pay.
WOMAN: Or used their houses as piggy banks.
MARK BLYTH: Subprime mortgages were the trigger that lit the dynamite of all those complex derivatives that were also part of it. But at the end of the day, what matters was how the explosion traveled through the system and why it blew up elsewhere in places where you didn't have subprime mortgages. And that has to do with the size of the banks and the way that they themselves were structured, with very little capital and a huge amount of liabilities that they paradoxically call assets.
BROOKE GLADSTONE: Number 2, it was caused by complex instruments, which are -- what?
MAN: Lehman Brothers was a big player in the credit default swap market.
MAN: It was the collateralized debt obligation.
MAN: … splitting of the tranches and the creation of CDOs and CDOs squared.
MARK BLYTH: So this is not as popular with other academics who like to show that they’re very clever by understanding –-
-- what all these esoteric instruments are. And it is an important part of the story, don’t get me wrong. Something called asset-backed commercial paper is really important as the plumbing for what happened. This is where everything flowed through. But, you know, you can kind of tell the story without really getting involved in the plumbing.
BROOKE GLADSTONE: That it was about excessive leverage.
MAN: What brought Bear Stearns down was, I think, basically we were highly leveraged and we thought the securities we had…
MARK BLYTH: Leverage is dead simple. When you've got an income of 100,000 you get a 300,000 mortgage, you’re leveraged 3 to 1. You want to know how bad it was in the financial crisis? There were four banks in Iceland that lent enough to the rest of the world to be 1,000% of the gross domestic product of Iceland.
BROOKE GLADSTONE: Wow!
MARK BLYTH: Yeah. So excessive leverage as a narrative was popular with bank regulators because, of course, what they want to do is have the banks have less leverage. And that would have been good, except that means the banks earn less money.
BROOKE GLADSTONE: Some say it was about inequality and credit.
JEFFREY BROWN/PBS NEWSHOUR: Since the top 1% now commands more than one-third of the wealth, how is the bottom 99% supposed to keep up with the Joneses, if not the Kardashians? By borrowing.
MARK BLYTH: And there’s certainly something to this. When you have wage stagnation for the majority of Americans for almost, if not, in some cases, more than a generation, how do you fill in the gap? People load up on credit on the expectation they’ll pay it off with higher wages but they don't have the higher wages; they just have a ton of debt. So when they become unemployed, they become insolvent like the banks and they drag each other down.
BROOKE GLADSTONE: Who would favor this narrative?
MARK BLYTH: Well, I would say everybody from Bernie Sanders onto the center.
The concern was inequality has become one of the touchstone issues of our generation, given the fact that it has risen to historical unprecedented levels. And the financial crisis exacerbated that, rather than actually reset it.
BROOKE GLADSTONE: How about the crisis was caused by Alan Greenspan who was head of the Federal Reserve from ‘87 to 2006, holding down interest rates for too long?
ALAN GREENSPAN: It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low.
QUESTION: But some of the Fed governors who worked with you at the time, they think interest rates were too low for too long.
ALAN GREENSPAN: I think they are mistaken.
MARK BLYTH: Essentially, he gave asset protection to everyone in the world. If the economy hits a bump, that means you’re going to earn less money. Don't worry, I'll make your borrowings cheaper so you don’t actually lose any money.
BROOKE GLADSTONE: [LAUGHS] With whom is this narrative about Greenspan popular?
MARK BLYTH: The Greenspan narrative is popular with people who write books about Greenspan, obviously.
It’s also popular with kind of the journalistic community because the thing about journalism is you want to attach it to personalities. So if you can point at someone who looks like Yoda and sounds like Yoda –
-- and said, they screwed up, that’s kind of popular.
BROOKE GLADSTONE: Last in our lightning round, the crisis was caused by bankers’ greed.
MARK BLYTH: You can't explain a variable with a constant.
It’s not as if there – you know, just imagine this. In 2005 they were all Mother Teresa and suddenly they all got greedy and it caused the crisis. It just doesn’t sound too convincing, does it?
BROOKE GLADSTONE: So I guess it’s possible that taken all together maybe they create the right narrative.
MARK BLYTH: Exactly. We’re always looking for “the cause” but when you have the generator of the whole thing as the entire global economy, why would you think one clause is what matters?
BROOKE GLADSTONE: A particular narrative about a cause that irks you more than any other is the one that says we spent too much money and now we have to pay.
MARK BLYTH: Federal debt was going down from 2000 to 2006 and it’s the same in Europe. There was no orgy of spending. So what happens is these giant behemothic banks that are massively over-levered and about to blow up the whole world, so you have to save them. That was the “too big to fail” thing. And then to do that you give them money to what's called recapitalize. You cushion the loans. You run big budget deficits. Close your eyes for six months and hold your breath, suddenly there’s a lot more debt. There was no additional spending on schools, hospitals, doctors, anything fluffy and pink that you like.
It all went to saving the financial sector.
BROOKE GLADSTONE: Mm-hmm.
MARK BLYTH: And they didn’t want that to stick as the narrative, so they were quite happy to have this enormous bait and switch where particularly politicians on the right used this as an excuse to kill programs that they never liked in the first place.
BROOKE GLADSTONE: And one thing you find galling, I know, is the tagline “too big to fail,” that if the government didn't do something for the banks terrible things would happen and they would happen to ordinary Americans.
MARK BLYTH: It’s a very convenient story and it may also be a true story. This is the most frustrating thing about it. We built this system whereby if any of the big banks that was so levered went down, it would take down the whole system. Now, we managed to save that and it only cost us $17 trillion in central bank bailouts and liquidity and all this other stuff. It only cost us a huge amount of lost output, unemployment, lives that have been transformed not for the better.
Now, if it had been too big to fail and the whole system had gone down, it might have been worse, absolutely. But at the same time, what we’re saying is let’s make sure that if you’re a giant institution you can take unbelievable risk and so long as you're too big to fail, the taxpayer will come and bail you out. This is what annoyed the Tea Party and I think they were absolutely right in this.
BROOKE GLADSTONE: There is a moment in February of 2009, just a month into the Obama administration, Rick Santelli of CNBC is on the floor of the Chicago Mercantile Exchange. He’s live on the show Squawk Box. Traders are standing all around him and he says this –
RICK SANTELLI: This is America. How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills? Raise their hand.
[NEGATIVE AUDIBLE REACTIONS]
President Obama, are you listening? Thinking of having a Chicago Tea Party in July! I’m gonna start organizing.
MARK BLYTH: The Tea Party was a kind of canary in the coal mine for the populism of the moment, if we think about Trump now and we think about Europe, even in Sweden.
BROOKE GLADSTONE: What’s Europe got to do with any of this? I mean, one of the sustaining narratives is that this was fundamentally an American problem, a problem with American banks.
MARK BLYTH: Oh yeah, well, that’s what we thought at first. The German finance minister said [GERMAN-ACCENTED], this is a problem of Anglo Saxon capitalism.
And then about six months later he found out that German banks and French banks and Belgian banks and British banks had bought 70% of the crappy mortgages. I believe the phrase is caveat emptor, buyer beware.
BROOKE GLADSTONE: Mm-hmm. [AFFIRMATIVE]
MARK BLYTH: And suddenly it was on European bank balance sheets. And it turns out European banks are [LAUGHS] twice as levered as the Americans at this point.
BROOKE GLADSTONE: What?
MARK BLYTH: So they were – yes, seriously. Deutsche Bank, in 2012 for every euro they had in reserves they had 60 out there in the world. Now, if that world is going south, you’re going to lose a lot more than one euro. So they were very on the hook for the American crisis.
BROOKE GLADSTONE: There’s a piece in the New York Times this week. It’s part of their Lehman Brothers collapse anniversary [LAUGHS] coverage, hooray! The policymakers saved the financial system and America never forgave them. I gather you would expand that to Europe, as well, as evidenced by the turn towards the right?
MARK BLYTH: Absolutely. And a very simple way to think about this is the following. British wages have been as stagnant for most groups as American wages prior to the crisis. So companies have been making profits. GDP, the measure of the economy, has been going up. Then there’s a giant crisis. Millions are made unemployed. People's incomes fall in real terms. The value of their assets falls in real terms. It’s taken them in Britain and in most of Europe a whole decade to get back to where they started in terms of their incomes. So you're saying that we, we saved the system. Yeah, but it cost me a decade worth of income and a hell of a lot of stress.
BROOKE GLADSTONE: Mm-hmm, mm.
MARK BLYTH: Well, of course, there’s going to be a political reaction to that.
BROOKE GLADSTONE: Why did it move towards the right instead of towards the left?
MARK BLYTH: But it didn't. If you look at southern Europe, all the countries that are debtor countries – the Spanish, the Italians, the Greeks, the Portuguese – they’ve all got left-wing governments or at least putatively left.
BROOKE GLADSTONE: Well, the Italians?
MARK BLYTH: It’s a coalition because they have Five Star in the south and they’ve got the right in the north. But Portugal and Greece and Spain all have left-leaning coalition governments. When you go to the north it’s all the right ones and the right ones are the creditor countries who’ve been fed a diet of we are the hardworking people and they’re the ones who spend all the money.
BROOKE GLADSTONE: Mm-hmm.
MARK BLYTH: And then we have a migrants’ crisis that comes and exposes to many of the people in those countries that there’s no money for them for hospitals or schools or training or whatever. They’ve had a whole decade of austerity. And guess what? A bunch of foreign people came up, and there’s language training, schools for them, etc., etc. This is the type of dynamite that right-wing populists thrive on.
BROOKE GLADSTONE: If you take a step back from 2008, as you've described in your book, it seems to be a 30-year history of workers being squeezed by low wages, which leads to ballooning debt.
MARK BLYTH: The ‘70s is all about inflation, and it was all about inflation because you had super tight labor markets and big unions and they were able to push prices up. So we spent 30 years deregulating our markets, making labor markets flexible, beating down on unions, globalizing our markets. And what you end up with is labor has no ability to affect price. And, indeed, most companies have no ability to affect price, if you take Amazon and these big giants.
So what does that mean? It means that profits then do not get split evenly between capital and labor; they all go to capital. And that’s the inequality skew. So we have now got to a point whereby that skew has become so gross that even bailing it out with lots and lots of credit has reached its limit. Think student loans. What are you going to do, another trillion dollars in student loans?
BROOKE GLADSTONE: Mm-hmm.
MARK BLYTH: So you’ve reached a limit of credit finance growth, but we didn't change the system. We built the banks back up again and said, please do it again.
BROOKE GLADSTONE: Just this week there was news from the Census Bureau that the household income in the US has finally reached its 2007 pre-recession levels at $61,372. Now, the income growth in the last few years is not from increased pay. It’s from increased employment. What does that tell you?
MARK BLYTH: It tells me we still have the, the Bill Gates problem. Bill Gates walks into a bar, on average we’re all millionaires.
BROOKE GLADSTONE: Right. And in 2015, Wall Street bonuses were $32 billion.
MARK BLYTH: And everyone on minimum wage in the whole country added together got precisely half of that.
BROOKE GLADSTONE: [SIGHS] So if nothing has changed and we still have American workers crushed by low wages, are we setting ourselves up for more personal debt, more borrowing from banks and -- the same amount of no regulation of their bigness? Are we to doomed to repeat this?
MARK BLYTH: I mean, it depends on where you are up the income distribution.
BROOKE GLADSTONE: Mm-hmm.
MARK BLYTH: If you’re in the top 20%, you’re not being crushed. If you’re in the top 10%, you’re positively being massaged. If you’re above that then, you know, I can’t even think of the metaphor.
BROOKE GLADSTONE: [LAUGHS]
MARK BLYTH: But when the next generation, the Millennials, can’t form assets – they’re not buying houses, they’re not buying cars because they’re too busy paying back debts, debts other generations didn't have to accrue because things were free, then you got a problem.
BROOKE GLADSTONE: Mark, thank you very much.
MARK BLYTH: A pleasure, call anytime.
BROOKE GLADSTONE: Mark Blyth is a professor at Brown University and the author of Austerity: The History of a Dangerous Idea.
BOB GARFIELD: Coming up, the arc of our attitude toward business, reflected in 90 years of film history.
BROOKE GLADSTONE: This is On the Media.