Alan Blinder is a virtually inexhaustible and long-standing source of muddled economic thinking. As such, he is the personification of the intellectual sophisms that put the wind in the central planning sails of both the Federal Reserve and the Clinton administration. As someone who has basically spent a lifetime drawing the wrong conclusions from economic events, it is completely unsurprising that Blinder has been affiliated with an Ivy League economics department, Princeton’s, for decades. The subsequent economic damage done by all the minds polluted by Blinder’s economic non-sequiturs is virtually incalculable. (Economics is routinely the most popular major at Ivy League colleges and Wall Street remains the most popular destination for Ivy League graduates.)
Blinder’s work at Princeton, as well as his role as a member of Bill Clinton’s council of economic advisors, (1993-1994), merely set the proverbial table for all the damage to come. Alan Blinder really started to cut his central planning teeth with the greatest group of central planners in the world – the Federal Reserve. Blinder served as Fed Vice-Chair from 1994-1996. Interestingly, he succeeded another MIT PhD. in economics named David Mullins. Mullins left the Fed and soon began to work with a heretofore little known hedge fund – Long Term Capital Management (LTCM). In just a few years LTCM would suffer an enormous collapse – a collapse that Mullins as a MIT PhD in economics was of course completely blind to. The collapse of LTCM would directly lead to the worst excesses of the Greenspan Fed, excesses that would then lead directly to the terminal phase of an enormous stock market bubble.
While Blinder was a member of the Fed, the Fed assented to the Clinton Administration’s bailout of Mexican bondholders in February 1995. This bailout was organized by President Clinton’s Treasury Secretary – who also just happened to be the former CEO of Goldman Sachs – Robert Rubin (#41). Not coincidentally, the bailout helped Goldman Sachs to avoid incurring losses on the $5 billion in Mexican bonds it held at the time of the crisis. (Goldman was also an underwriter of the bonds.) More important than providing yet another example of the toxic nexus between the government and financial elites, the bailout led to an underappreciation of the enormous risks in lending to the so-called “developing world.”
In these lending programs, enormous amounts of money, denominated in dollars, were loaned to developing nations. However, these developing nations did not use the dollar as their currency. As a result, any income that resulted from the investments made with the borrowed dollars was almost always earned in the local currency. Because these local currencies often plunged in value and the loans still had to be paid back in dollars, the proverbial blind man on a galloping horse could see the risks associated with lending programs of this type. (If the local currency fell in value against the dollar, then much larger amounts of the local currency would be needed to pay the loan back.) As a result of the bailout of Mexican bondholders, an underappreciation of the risks involved with foreign lending was perpetuated. Consequently, when the next foreign lending crisis came – which it did in July 1997 as the Asian financial crisis – the crisis was guaranteed to be much bigger and far more damaging than the crisis that was supposedly avoided by Mexico in 1995. Arguably, the disastrous 1995 bailout of Mexican bondholders – and Goldman Sachs - was the first application of what came to be known as the “Greenspan put.”
In exactly the same way he failed to draw the correct lessons from the Mexican bailout, Blinder failed to draw the correct lessons from the tech bubble era of the late 1990s. Along with a future chairwoman of the Fed, Janet Yellen, Blinder authored a book that extolled the completely non-existent economic virtues of the late 1990s, The Fabulous Decade. This book makes it clear that Blinder was – and remains, as he has never disavowed this book – almost completely ignorant of how an economy really works and how real wealth is created. The silly conclusions in this book rest on two enormous mistakes on the parts of Blinder and Yellen;
- They were completely confused by the hedonic adjustments to economic statistics that made the economy appear far stronger than it actually was.
- They misinterpreted an enormous stock-market mania as genuine wealth production.
In spite of these two massive errors, the book still serves an enormously important purpose; it demonstrates, incontrovertibly, the enormous ignorance that has animated the Federal Reserve for decades on end.
Regrettably, Blinder’s blunders didn’t end with his complete misunderstanding of the tech bubble era. After the financial crisis, he endorsed one of the most economically irrational programs of the Obama administration. The program was “Cash for Clunkers.” In this program, automobiles – which were fully functional, licensed to be on the road and had economic value – were destroyed. The program required the cars to be destroyed, not simply turned in. For volunteering your car for destruction, a person would receive a nominal amount of “cash” which could only be used to purchase a new car. (The cash was only a small fraction of the purchase price of a new car.) Apparently, Blinder and other proponents of the plan believed the economic interests of the country were advanced by destroying things with economic value. Of course, the program did lead to the purchase of some new automobiles, but along with the new automobile came new car payments. To anyone who pauses for an instant to think about the ramification of this program, it becomes immediately clear that every dollar spent on car payments is one less dollar the purchaser could spend on other goods. There is no way a program like this could ever lead to real economic growth. In fact, by believing economic growth could be achieved by a destructive catalyst – destroying used cars - cash for clunkers is nothing more than one of the oldest economic fallacies - Frederic Bastiat’s broken window fallacy – camouflaged in an MIT PhD.
See Austan Goolsbee (#25) for another example of the economic geniuses who typically occupy the council of economic advisors. See Alan Greenspan (#29) for his disastrous, world-altering reaction to the LTCM crisis. See Frederick Mishkin (#36) for another example of the doltish thinking that dominates the highest reaches of the Federal Reserve.