Raghuram Rajan made a name for himself at the Jackson Hole conference in 2005, which was a kind of send-off for the victorious Alan Greenspan. Alas, but the paper he brought was not appreciated at the time, as it pointed to imbalances in the financial system.
He was ahead of the curve. Thus his book on the economic crisis deserves our attention. More than most, he sees the problems in a global way, across nations and across asset classes.
His view is that for a variety of reasons, income inequality grew in the US, and in order to paper over that, the government encouraged a credit-oriented society to allow people to stretch for prosperity, hoping that the debts would not catch up with them.
It was a fool’s bargain. Debt deceives average people. They overestimate their ability to repay, and end up defaulting at high frequencies.
Like me, he is critical of the Fed’s monetary policy during the ’00s as being too easy. The “Great Moderation” was a result of over-stimulus, not of sound policy.
Similarly, he faults banking regulation for being too easy, leading to private profits with public risk.
This is a well-written book from a man who was ahead of the curve. I recommend it.
Quibbles
Where I differ with Dr. Rajan is how easy it would be to fix income inequality in the US. He suggests a number of policies, many of which sound good, but have the Federal Government intervene in matters that they can’t handle effectively. Persistent unemployment is a problem, but should that be handled by the Federal Government. Far better in my opinion that it be handled informally and locally, by family and friends, that there would be more urgency, and more willingness to compromise in finding work.
Retraining is a good thing, but also not something the Federal Government does well. One of the beauties of the US is that we have community colleges, which can retrain people at modest costs.
He also levels a decent amount of the blame at Fannie and Freddie and the Community Reinvestment Act, for making too many lousy loans. He is correct in direction, but not likely in degree. Yes, they were problems, but not the leading problems.
But these are mere quibbles on an otherwise excellent book. If you want to buy the book, you can buy it here: Fault Lines: How Hidden Fractures Still Threaten the World Economy
Who would benefit from this book
Anyone who wants a comprehensive view of the crisis would benefit from this book. It does a fairly complete job, and is not long at ~230 pages.
Full disclosure: The publisher sent me a copy, because I met the author at a conference, and asked to receive a review copy.
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