PREFACE

When the music stops... things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing.

Those were the immortal words on July 8, 2007, of Chuck Prince, then the CEO of Citigroup. It may be the most famous, or infamous, quotation of the entire financial crisis. Almost exactly a month later, the music stopped abruptly—and so did the dancing.

True to Prince's prophecy, things got quite complicated and very ugly—not only for Citigroup but for the entire world. The high-stakes game of musical chairs turned out to be remarkably short on seats, and large swaths of the financial industry fell rudely to the floor. The U.S. economy subsequently sank into its worst recession since the 1930s. The U.S. government, which was led at the time by a bunch of alleged free-marketeers, was called upon to ride to the rescue multiple times—not because the financial firms deserved it, but because the chaos threatened to pull all of us down into the abyss with them. They were incredible events.

But the story of the financial crisis of 2007–2009, or at least parts of it, has been told many times, in many different ways, in a wide variety of books and articles. So why yet another work about the crisis and its aftermath?

One reason is simply that the American people still don't quite know what hit them , how and why it happened, or what the authorities did about it—especially why government officials took so many unusual and controversial actions. Misconceptions about the government's role are rife to this day, and they are poisoning our politics. Was government part of the problem, or part of the solution? This book attempts to answer these and related questions. The version of the story I tell focuses more on the why than on the what of the crisis and response. No one else has done that to date.

Doing so is important for several reasons. One is that a comprehensive history of this episode has yet to be written. A number of fine books, mostly by journalists, have examined pieces of the puzzle, sometimes in excruciating detail. The book you hold in your hands is different. It's not a work of journalism, so if you want to learn about who said what to whom when, you are best advised to look elsewhere. My purpose, instead, is to give the big picture rather than focus on just one or two pieces. One day, some ambitious historian will put everything together in a two-thousand-page tome. My version of the story is comprehensive but shorter. It is also less of a whodunit and more of a why-did-they-do-it?

An even more important reason for writing this book is that the events recounted here are still reverberating , both in the United States and around the world. You read about them every day, and they will pose major public policy challenges for years. The U.S. economy has not yet climbed out of the ditch into which the financial crisis and the Great Recession drove it. Unemployment remains high, the budget deficit is still huge, and the mortgage foreclosure problem festers. In Europe, the crisis is still unfolding. Some of the remedies put (or not put) into place in response to the crisis remain under vociferous, and often highly partisan, debate. That includes the Dodd-Frank financial reform act of 2010, the continuing foreclosure mess, the monstrous federal budget deficit, the Federal Reserve's ongoing efforts to boost the economy, and more. Unlike most books on the crisis, this one zeroes in more on public policy than on the mysteries of modern finance.

Finally, this book looks to the future . The financial crisis and ensuing recession have left us with a long agenda of unfinished business. How can and should we finish it? Furthermore, there will be financial crises in the future. Will we handle them better because of what we've learned, both economically and politically? Or will we forget quickly? Many changes—both institutional and attitudinal—were, or were not, made. What are our remaining vulnerabilities? What future problems may we have accidentally created while fighting the various fires?

The narrative offered here is largely chronological. After all, stories are best told that way, and this is quite a story. But I deviate from chronology when doing so is important to understanding the issues at play. The central questions for this book are: How did we get into this mess, and how did we get out of it (to the extent we have)? Where did policy makers shine, and where did they err? What's left to be done before it's all over?

After an introductory chapter, part II describes and explains how the crisis developed and unfolded. Parts III and IV then dwell on the policy responses—first, the emergency actions that were taken to forestall catastrophe, and then the longer-term fixes that were (and were not) put into place. This section of the book ends with an important chapter that tries to unravel the essential paradox of the entire episode: that under-regulated markets ran badly off the tracks and the government rushed in to save the day, yet the government emerged as a villain. Why were the policy successes (and some failures) greeted with Bronx cheers? After the review of the past and the present, part V turns to the future. How do we get out of the remaining mess? What lies ahead? What have we learned from our bitter experience?

There is a sense in which I should be thanking everyone with whom I've ever had a conversation about finance, crises, regulation, monetary policy, politics, and the like. For my views on these and related matters have evolved over decades of watching and reading, talking and thinking, writing and teaching—and working in academia, finance, and government. But more directly pertinent to this work, I am deeply grateful to a number of public officials, financial experts, journalists, and scholars who helped me with conversations or correspondence about particular matters raised in the book, or who offered useful comments or suggestions on earlier drafts of the manuscript. Sincere thanks go to Ben Bernanke, Scott Blinder, Dan Clawson, John Duca, William Dudley, Stephen Friedman, Timothy Geithner, Erica Groschen, Robert Hoyt, Nobuhiro Kiyotaki, Edward Knight, Sebastian Mallaby, Michael Morandi, Craig Perry, Ricardo Reis, Robert Rubin, David Smith, Launny Steffens, Lawrence Summers, Phillip Swagel, and Paul Willen for taking the time to share their knowledge. Philip Friedman, in particular, must be singled out for reviewing the entire manuscript and offering numerous valuable suggestions. Importantly, none of these people should be associated with any of the conclusions I've reached. I know that several of them disagree with some important particulars. Blame everything on me.

Most of the book was written during a sabbatical year from Princeton University in 2011–2012, about half of which was spent at the Russell Sage Foundation in New York—to which I am truly indebted. From its president, Eric Wanner, on down, Russell Sage deserves high praise for providing the perfect work environment for a visiting scholar. In particular, Galo Falchettore, Claire Gabriel, and Katie Winograd provided useful assistance on the manuscript. Without the free time to ruminate and write, I would probably still have a rough draft sitting on my hard drive.

My research at Princeton has long been supported by the Griswold Center for Economic Policy Studies, whose generous support continued through the writing of this book. A big thank-you is due. I am also indebted to my student research assistants—Armando Asuncion-Cruz, who started it all off, and Joanne Im and Kevin Ma, who finished it up—and even more indebted to my longtime, terrific assistant, Kathleen Hurley, who manages to get everything done in less time than seems humanly possible—and always with a smile.

When the time came to turn the manuscript into an actual book, my first (and wise) stop was at the offices of John Brockman, who became my literary agent and steered me in a number of good directions. One of them was to Penguin Press, where I acquired yet more debts to a number of fine people who do their jobs exceedingly well. My editor, Scott Moyers, was at once a big booster and a smart but friendly critic whose good judgment improved the book in numerous ways. Scott's assistant, Mally Anderson, always had the right answer to every question, and delivered it with good cheer. Juliana Kiyan handled publicity deftly.

Finally, what can I say about my lifetime companion and wonderful wife, Madeline, to whom I owe so much? She fixed my prose and sharpened my arguments when they needed fixing or sharpening. She kept me from flying off on tangents and steered me away from rhetorical excesses and impenetrable jargon. She encouraged me when I needed encouragement and nudged me when I needed to be nudged. This book is dedicated, lovingly, to her. We were married in 1967 and, for us, the music has never stopped.