SCOTT SIMON, Host:

We turn now to Alan Blinder who was vice chairman of the Fed's Board of Governors during the Clinton administration. Professor Blinder is with the economics department of Princeton University. He's with us because of his expertise in economics, but in the interests of full disclosure we want to point out that he's been working as an adviser to Barack Obama's political campaign. Professor Blinder, thanks so much for being with us.

ALAN BLINDER: My pleasure, Scott.

SIMON: Has government intervention helped?

BLINDER: Yes, but so far not enough. If we're to believe what we read in the newspapers, more is coming in a big way with some kind of large-scale intervention, apparently - though I caution we have nothing yet - similar to the RTC in the early '90s.

SIMON: Can the government afford all this money?

BLINDER: The government can...

SIMON: Can the American people afford all this money?

BLINDER: You know, I view those two questions as much the same. The government is us, and the answer is yes. The key question is the importance of the expenditure, because I do think something like this is necessary at this point.

SIMON: Professor Blinder, what would happen if the government just stood by? Could you run that through for us?

BLINDER: Well, the honest answer is nobody knows. But we had something analogous to that in the 1930s. And that's the last time the financial system looked this scary, where the government basically did stand by until Roosevelt. And we had an implosion of the banking system. We had an implosion of the securities markets. We didn't have any of these derivatives and other fancy stuff to implode, but they certainly would have blown up also. What you get generically in a panicky situation is a cascading series of defaults and asset devaluation.

So, company A goes under, or is afraid it's about to go under, needs cash desperately. So it dumps any assets it has, regardless of the price. That depresses the price for other people that hold the same or similar assets, who then get into trouble. In the worst case, company A can't make its payment to company B, and now company B is in the soup. And it goes like that. That's what the Fed and the Treasury have been trying to forestall these past days and weeks.

SIMON: And is in the middle - the last few weeks, in fact, of a presidential campaign, is that the worst or is it the best time to have this crisis hitting? Because it does seem it got an awful lot of people, who ordinarily don't agree on anything, eager to work something out.

BLINDER: Yeah, what a great question. My thinking going into the last few days was the worst time. That you have a lame duck president who is extremely unpopular, you have an election being hotly contested right now with brickbats being thrown by each side. But I would have thought it's very, very difficult to get anything serious done, much less something as new and out of the ordinary as this in an environment like that. But we have the leadership of the House and Senate, both Republicans and Democrats, sounding friendly. I hope it holds. We could certainly use it now.

SIMON: Alan Blinder, who was vice chairman of the Fed's Board of Governors in the Clinton administration, now teaches at Princeton. Thanks so much for being with us.

BLINDER: My pleasure, Scott. Transcript provided by NPR, Copyright NPR.

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