Economist Raghuram Rajan was one of the prophetic ones at the central bankers conference where Alan Greenspan was present in 2005 and delivered his paper asking, “Has Financial Development Made the World Risker?” The answer to this question in Rajan’s head was yes, but all other critics it was no, however more recent events; that of the 2008 crisis has proved him correct.
Rajam has thus written a 2010 business book of the year and Financial Times book of the year entitled, “Fault Lines – How Hidden Fractures Still Threaten the World Economy”. The author uses a geographical reference in the title of his book to show that there are cracks within the financial sector that have led to the global crisis of 2008. Prior to Raghuram being a professor at Chicago University, he was a chief economist at the International Monetary Fund (IMF) so his perspective and outlook is on global scale rather than just focusing in on the United States. He takes on an approach that includes growth patterns and rates in developing countries, and other financial crises to help the reader understand what is happening in the United States.
Rajan discusses three primary fault lines in the financial sector; the first being the domestic political stresses, especially in the United States. Starting in 1991, Rajan argues that recessions have mostly been “jobless” where there are more jobs being lost than created and inefficient jobs are being lost due to technology increase. Policymakers look for a quick fix to unemployment and offer easy solutions such as lower interest rates, promote homeownership instead of fixing the root of the cause (improving education and retraining employees). Coupled with a weak safety net, there is more jobless anxiety and eventually pushes the Feds to act quickly rather than rooting the problems. The pressure for easy credit makes up the first fault line in this book.
The authors raises very good points when outlining the fault line of rising income inequality coupled with a weak safety net due to his IMF background and global knowledge. One weakness I would like to point out would be when Rajan seems to step out of his comfort zone to speak about homeownership, (Fannie and Freddie) “IT is difficult to reach any other conclusion than that this was a market driven largely by government, or government-influenced, money” (Rajan, 34). Indubitably Fannie and Freddie need to take some blame but it was more of Wall Streets doing which created the intense and instable demand for subprime mortgages.
The second major fault line that creates stresses in the financial sector is that of the unbalanced growth in the global economy. These trade imbalances Rajan is very well known for while working in the IMF. Export-oriented countries like China and Germany encouraged the debt-ridden developed countries to invest in these countries. China, being a managed capitalist economy, buys dollars from their international exporters but gives them local currencies so...