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Raghuram Rajan was one of the few economists who warned of the global financial crisis before it hit. Now, as the world struggles to recover, it's tempting to blame what happened on just a few greedy bankers who took irrational risks and left the rest of us to foot the bill. In Fault Lines, Rajan argues that serious flaws in the economy are also to blame, and warns that a potentially more devastating crisis awaits us if they aren't fixed.
Rajan shows how the individual choices that collectively brought about the economic meltdown--made by bankers, government officials, and ordinary homeowners--were rational responses to a flawed global financial order in which the incentives to take on risk are incredibly out of step with the dangers those risks pose. He traces the deepening fault lines in a world overly dependent on the indebted American consumer to power global economic growth and stave off global downturns. He exposes a system where America's growing inequality and thin social safety net create tremendous political pressure to encourage easy credit and keep job creation robust, no matter what the consequences to the economy's long-term health; and where the U.S. financial sector, with its skewed incentives, is the critical but unstable link between an overstimulated America and an underconsuming world.
In Fault Lines, Rajan demonstrates how unequal access to education and health care in the United States puts us all in deeper financial peril, even as the economic choices of countries like Germany, Japan, and China place an undue burden on America to get its policies right. He outlines the hard choices we need to make to ensure a more stable world economy and restore lasting prosperity.
Dismissing the 2008 recession as an inevitable free market setback might seem simple, but economist Raghuram G. Rajan doesn't take the easy path. He makes a compelling case that the weak links in the global economy remain both visible and fixable. In a provocative analysis unhindered by ideological boundaries, Rajan argues against such government interventions as propping up the U.S. housing market. Yet he urges Americans to create a more generous safety net for unemployed workers facing a "jobless recovery." Rajan's more challenging suggestions, such as rebalancing the international economy or changing global monetary institutions, may not shift policy makers' actions, but he argues persuasively that failing to do so will mean deeper fault lines in the next crisis. getAbstract recommends his book to those who want a clear-eyed economic analysis.
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Posted June 10, 2011
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Raghuram Rajan, formerly chief economist at the International Monetary Fund, now Professor of Finance at the University of Chicago Booth School of Business, has written an interesting book on the current crisis. It is a mixture of shrewd analysis and reactionary politics.
He notes, "Greater immigration and trade have also played a part [in increasing inequality] because immigrants, competing directly for unskilled jobs, and unskilled workers far away, competing through trade, have both served to hold down wages of unskilled U.S. workers." Yet he recommends encouraging mass migration and increasing world trade.
Low short-term interest rates encourage investors to put money into houses, stocks, bonds, oil and metals, producing bubbles in these assets. Rock bottom interest rates transfer wealth from savers to bankers. It is a one-way bet for bankers - gamble, cause a crisis, then get more profits from low interest rates.
Rajan points out that Federal Reserve policy turned the entire USA into a giant hedge fund, investing in risky assets abroad, financed by debt issued to the world. Wall Street became a crooked casino which puts no limit on gamblers' gains but covers their losses. If run as a private enterprise, it would have gone bust; it could only survive as a leech on the public.
He notes, "The problem stems from the fundamental incompatibility between the goals of capitalism and those of democracy." He also notes the USA's hugely unequal access to health care and education and the need to invest in improving access to quality education and universal health care. Then he urges public spending cuts and tax rises, which gives the lie to these commitments.
As Rajan observes, "aid leads to dependency, indebtedness, and poor governance and rarely leads to growth." And, "the more a country finances its investments through its own domestic savings, the faster it grows. Conversely, the more foreign financing it uses, the more slowly it grows."
He asks, "how can the United States reform the financial system so that it does not devastate the world economy once again?" Then he opposes reform and defends 'the basic structure of a system that has failed' (as he admits). All he proposes is "transparency to draw the interested public into monitoring the relationship between the government or regulator and the financial sector." That's it! This of course wouldn't have prevented the next financial crisis (now happening in the eurozone).
He writes that governments 'have to step back . to allow the market to function effectively'. He opposes nationalism (which he absurdly equates to fascism) and protectionism. Instead, he promotes beggar-your-neighbour competition between countries. He concludes "Other countries [meaning China] have to implement reforms that will help rebalance the world economy."
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Overview
Raghuram Rajan was one of the few economists who warned of the global financial crisis before it hit. Now, as the world struggles to recover, it's tempting to blame what happened on just a few greedy bankers who took irrational risks and left the rest of us to foot the bill. In Fault Lines, Rajan argues that serious flaws in the economy are also to blame, and warns that a potentially more devastating crisis awaits us if they aren't fixed.
Rajan shows how the individual choices ...