How Did We Get Into this Mortgage Mess, and How Do We Get Out?      Panel presentation in April 2008 on the sub-prime crisis Alan Blinder’s comments – 6 Lessons and two pieces of wishful thinking… Originate & Distribute Model: Keep it, but be mindful of it. Regulate non-bank lending: the banks have problems enough, and their regulators are under greater scrutiny, but the non-bank lending has had no federal oversight and little, if any, state oversight. Mark to Market: Legitimate problems with it when markets stop functioning. Face value is the wrong answer, but it reminds him of Churchill on democracy – the worst form of government until you start to think about the alternatives Reduce leverage: He is specifically thinking about the broker dealers. If an institution is going to have the protection of the Federal Reserve, then they have to operate with less leverage. Eg. 33x leverage from Bear Stearns vs traditional banks at 10x leverage. Greater supervision: “We made a mistake in 1999 when we abolished Glass-Steagal and brought down the wall.” There needs to be greater oversight, and it needs to operate across borders. Rating Agencies: We need to do something about them, but what it is, is unclear. He has heard of two ideas, which he finds valuable. If they can’t be paid by the buyers, and the sellers are conflicted: Have them hired and paid by the SEC or some other government agency Rather than be paid with cash, pay them with a slice of the issue, adjusted for the default probability. If they get it right, they win Two pieces of wishful thinking: One: Fewer complicated derivatives, more plain vanilla, exchange-traded Two: More transparency in the non-financial institution component, such as hedge funds “In my morbid moments, I fear two things” One, if contagion spreads to things like credit card receivables Two, if money-market funds start breaking the buck

7 September 2008 in video