Alan Blinder: An absolute Blinder

An economist who says the US government has played its cards perfectly remains fully optimistic

From Wall Street bosses locked in a room and ordered to take government money, to the Treasury Secretary on his knees begging the Speaker of the House for support, the Great American Credit Crash has been studded with extraordinary scenes. One of those was on 27 April this year. At the White House that night, Barack Obama called in five of the most prominent economists not advising his administration for a dinner of salad and roast beef and an intellectual joust over the direction his team was taking. For two hours, it was a kind of "economics gladiators", as critics urged the President to nationalise the worst-hit banks, and Mr Obama's advisers and Treasury team argued the opposite.

Alan Blinder was one of the gladiators, if that does not seem an unlikely term for the bald, bespectacled and carefully spoken professor of economics from Princeton University. "It was a pretty unusual event," he says, his foot resting on the book-strewn coffee table in his jam-packed campus office. "With Obama, you're not talking to a stone wall or someone just reading his talking points. He wanted to hear what the critics had to say and why, and he wanted to hear his own people rebut them. We focused on the financial: the banks are going to hell, so what should we do about them? Both Paul Krugman and Joe Stiglitz were pushing for nationalising banks and Tim Geithner and Larry Summers didn't want to do that – and neither did I."

We know how it turned out that night. Mr Obama's thumbs-up went to his in-house gladiators, and to Mr Blinder. The banks have been allowed to stumble on, hopeful that a little economic recovery will detoxify the toxic assets on their balance sheets.

Now, after a long period where doctor dooms and nervous nellies dominated the airwaves, it is the academics on the optimistic wing of the economics profession who are currently in demand. Mr Blinder is even spoken of as a potential chairman of the Federal Reserve should Mr Obama decide to remove his long-standing Princeton colleague and friend Ben Bernanke at the end of his term in January.

The 63-year-old Mr Blinder shares the President's passion for playing basketball. He has lived almost his whole life within a short train ride of New York City, where he was born to a small businessman whose ventures included vending machines and restaurants. At 18, he went into economics, he has said, because he wasn't smart enough for mathematics – and Princeton has been his sanctuary for almost four decades now. "I feel increasingly confident that when the history is written, the bottom of this recession will be the summer of 2009," he says. "The much-maligned stimulus is having its maximum effects now, thanks to aid to the states and localities, and though it's not technically part of the stimulus, the cash-for-clunkers scheme."

He dismisses the double-dippers, those who argue that high personal debt and unemployment will crimp the US consumer, which accounts for 70 per cent of the economy. "They argue that if the 70 per cent doesn't move, the train doesn't move. But it can be passive rather than active. Investment components – inventories, houses and business investment – and government are going to be doing the pulling." So he remains optimistic. But for an optimist, he has some pretty pessimistic things to say about the future. That's because the very success of Mr Bernanke and the Treasury, and their counterparts across the world, has obscured how close to the brink the global financial system and the economy came last year.

"It's tragic and it's paradoxical. We did all these things and a lot of them worked – it wasn't perfect – and now you have people saying we shouldn't have done them. It's a huge non sequitur and the problem is that it can have serious consequences. I'm worried right now is that one victim of this foolishness is financial reform. Then we're open to a repeat performance.

"It's not going to happen soon, because the private sector participants have had their fingers burned – badly burned, mutilated – but people have an amazing propensity to forget the past, and it won't be long before people start thinking the coast is clear."

The Wall Street banks have already made major headway with their argument that too much regulation will force banking offshore, winning concessions on pay reform in the UK and derivatives reform in the US, but Mr Blinder cautions governments not to pay too much heed to their lobbying.

"You have a lot of people who believe in freedom of enterprise and that they should be fabulously rich looking to take their business somewhere else. That's the danger, but it's exaggerated because the choices of somewhere elses are not manifold. It's not an accident that all the 'American' hedge funds are in the Cayman Islands. It's because the UK has not been sufficiently vigilant in supervision that they can run to the Caymans. But on many issues, if you can just get agreement between the US and the UK, who are not so far apart on a lot of these things, you can do a world of good. Where are they going to go, if they can't hide in London or New York? Outer Mongolia? I don't think so."

For all his contributions to the big economics debates of the moment, a blackboard in Mr Blinder's office is a reminder that he is still an academic economist. It is scribbled with formulae in yellow chalk, incomprehensible to the layman, but – he says – showing nice and clearly to him the economic effects of companies sending American jobs offshore, his specialist subject.

How much time he has to pursue that academic work depends on the calling of public service, of course, but talk of the Fed chairmanship is "hypothetical", he says. And there oughtn't be a vacancy.

"Starting from some days after Lehman Brothers right up until now, Bernanke's performance has been nearly flawless, fabulous. He has been creative and gutsy at a time when creativity and guts were necessary. He never could have imagined four years ago what was coming. Nobody did. He looks like he is feeling the pressure. He's aged a lot more than two years in the last two. But I think he wants to finish the job.

"We do not want the government owning a big insurance company, being majority shareholders in a big bank, having bank reserves at $800bn when they probably should be $50bn in a normal world, or holding most of the mortgage-backed securities in America – we don't want that for the long term, and Bernanke certainly doesn't want any of that. There's a huge unwinding job yet to be done."

Alan Blinder: CV

Alan Stuart Blinder

Gordon S Rentschler Memorial Professor of Economics, Princeton University

Born: 14 October 1945

Personal: Married to his high-school sweetheart, with two sons

Hobbies: Basketball, skiing, tennis

Education: Princeton, London School of Economics, MIT

Author: Numerous books, including the textbook Economic Principles and Policy

Views: Liberal, Keynesian

Career: Member of President Bill Clinton's council of economic advisers (1993-94); Vice-chairman of the Federal Reserve (1994-96)

Other posts: Research associate at the National Bureau of Economic Research, official arbiter of US recessions