Fractures in world economy

After the global financial calamity struck in 2008, many analysts put the blame on the uncontrolled credit expansion in the United States that preceded it. But E.H. Carr reminds us that complex historical phenomena are rather like an accident that takes place during a misty night when a driver speeds along a slippery road, a pedestrian crosses it, and the brakes of the motor vehicle fail. What exactly caused the accident?

Fault Lines: How Hidden
Fractures Still Threaten
The World Economy
Raghuram Rajan
Harper Collins
Rs 499; Pp 288

Land of inequalities
The merit of Raghuram Rajan's work is that he traces the many fault lines that lay beneath the surface not only in the American economy, polity, and governance, but also in the increasingly distorted economic and financial relationships between nations. Rajan begins with the American scene. America is a land of opportunities, but they can be taken advantage of only by those who have the resources, physical as well as human. Because these resources are unequally distributed, it is becoming a land of growing inequalities. In 1976, the top one per cent of households accounted for 8.6 per cent of income, but by 2007 this had shot up to 23.5 per cent. And in 2008, seven out of 10 Americans had stagnating incomes. Because of the strong commitment to the free enterprise system, the country is also rather backward in the safety net it provides for workers. But a democratic polity cannot completely ignore them, and there is something of a moral commitment to help the needy.

Full report here Hindu

A pre-fab earthquake

The foreteller of the financial crash ignores a Left-Right binary, faults endemic inequality and political quick-fix

If he were that sort of person Raghuram Rajan would have said, “I told you so!” He had more reasons to say it than almost anyone. In 2005, he shocked a room full of top US policymakers and bankers in Jackson Hole. They were celebrating the legacy of Alan Greenspan, who was about to retire as the Federal Reserve chairman. Rajan argued that financial innovation (partly made possible by Greenspan’s scepticism over financial regulation) had made the world economy less safe.

“I felt like an early Christian who had wandered into a convention of half-starved lions,” recalled Rajan, who is professor of finance at the University of Chicago’s business school and formerly chief economist of the imf. One of the few to sound an alarm before 2007, Rajan was “raining on the parade” that sought to prove that Greenspan was the best central banker in history. No one likes a Cassandra; Rajan was roundly criticised for his views by a cast of luminaries. One of them was the distinguished Lawrence Summers, who now heads the National Economic Council at the White House. Summers derided Rajan for his “slightly lead-eyed premise”.

Full report here Outlook

Book by PM's economic advisor on business award list

In what is seen as a boost to Indian non-fiction publishing, a book by Raghuram Rajan, economic advisor to the prime minister, has been shortlisted for the sixth annual Financial Times and Goldman Sachs Business Book of the Year Award.

Fault-Lines: How Hidden Fractures Still Threaten The World Economy was one of six books shortlisted for the award, said a statement by the publisher, HarperCollins-India. The winner will be awarded a purse of 30,000 pounds and a citation.

The book probes the hard choices that can prevent another recession. The financial collapse of 2007 and the 'great recession' that followed left many economists on the defensive.

The book asks what happened to the usual regulatory checks and balances and to the discipline imposed by markets?

What happened to the private instinct for self-preservation? Is the free enterprise system fundamentally flawed? These are not questions that would arise if this were 'just another' emerging market crisis. And given the cost of this crisis, we cannot afford facile or wrong answers. Fault Lines tries to look at answers to the questions raised during the recession.

Full report here Sify

Book business

The chances of an Indian origin author winning the prestigious £30,000 Financial Times and Goldman Sachs Book of the Year Award 2010 has shortened to one in three.

This is because the shortlist of six, just announced, includes: The Art of Choosing by Sheena Iyengar (Little, Brown, Twelve/Hachette Group) and Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan (Princeton University Press).

The judges include Uganda-born Baroness Shriti Vadera, who made grown men weep, it is alleged, when she was Gordon Brown’s adviser at the Treasury.

Full report here Telegraph

Much to gain from a successful India

India’s economy is more balanced than that of other fast-growing Asian economies, observes Raghuram G. Rajan in ‘Fault Lines: How hidden fractures still threaten the world economy’ (Collins). “Partly as a result of democratic pressures, it has not been as biased towards producers or exporters, and therefore does not require a major change in strategic direction. However, there are a number of areas where it needs to act far more decisively and rapidly than it currently is doing,” he adds.

Foremost in the section on ‘impediments’ the author rues that India has the people but the jobs are not where the people are, and that not all the people are necessarily capable of undertaking the jobs that are being created.

Many of the new jobs are in the fast-growing, better-educated western and southern coastal states that are connected through rail, roads, and ports to the big cities and to the global economy, but much of the population growth in India is taking place in states like Bihar, Madhya Pradesh, and Uttar Pradesh, he reminds. With incomes in these states lagging behind owing to the level and penetration of education and infrastructure, ‘many of the people have voted with their feet, migrating to work in the overcrowded cities of the richer states.’

Full report here Hindu

Two PIO writers on FT book award list

Two Indian-origin writers figure in the long-list of 18 books for nominated for the Financial Times and Goldman Sachs Business Book of the Year Award.

The award, which is in its sixth year, aims to identify the book providing the most compelling and enjoyable insight into modern business issues, including management, finance and economics.

The two books by Indian-origin writers are 'The Art of Choosing', by Sheena Iyengar published by Little, Brown, Twelve/Hachette Group and 'Fault Lines:How Hidden Fractures Still Threaten the World Economy', by Raghuram Rajan published by Princeton University Press.

A shortlist of six books determined by this year's judging panel will be announced on 16 September and the winner will be announced at Award Dinner in New York on 27 October.

The winning author will receive 30,000 pounds and other shortlisted authors will each receive 10,000, pounds an increase of 5,000 pounds over previous years.

Full report here Deccan Herald

Inequality is not necessarily bad; it can be a positive force

Political interventions, especially cheap housing credit, were as much responsible for the economic crises in the US as the unbridled financial capitalism, argues Raghuram G Rajan, noted economist and honorary adviser to Prime Minister Manmohan Singh in his latest book Fault Lines. Low-cost credit was a political reaction to contain the adverse effects of income inequality in the US. In a candid interview with Sunny Verma of FE, Rajan discusses critical issues crippling the financial world as well as emerging regulations such as entry of fresh private banks in India. Excerpts:

What is the motivation behind the new book?
I felt that we were focusing on too narrow a view of the problems that led to the global economic crisis. I saw that this crisis is really reflecting a deeper malaise in specific countries, which is seen as a more general problem. This book is to detect the problems and to find the solutions.

It appears that to an extent, you have turned your first book — Saving Capitalism from the Capitalists — on its head. Now we are finding faults with the financial system that produced somebody from nobody.
That might not be the correct reading. In a sense the underlying premise of both books is the political fragility of free enterprise capitalism. It is saying that you need to get the political forces on board to get the right structures for free enterprise capitalism to flourish. That is the kind of capitalism that gives greatest opportunity to greatest number of people. Now the treatment in this book is in a sense quite similar. But it is saying that capitalism doesn’t seem to be working for people is because they don’t have capability to compete in a market system. So they will put enormous political pressure on the system to subvert the process of capitalism. And I argue this crisis was in some ways because of the good intentions of politicians who saw people falling behind, who saw that they didn’t have sufficient jobs that were being produced by the economy and they decided that the one way to keep them happy was to give them cheap credit, especially housing credit. That process eventually attracted the private sector in a big way and the private sector went over board. So in some sense even the commonalities are this extremely important interaction between the political forces and the market economy.

Full interview here Financial Express

Faultless Lines

First, a complaint, maybe a fruitless one that ignores the reality of global publishing’s market realities: why did this book take so long to come to India? HarperCollins is big in India. Could Collins Business, an imprint of HarperCollins, have got the book here faster? A-list Hollywood movies are released faster in India — sometimes on the same day as in the West — than A-list books published in America. Does that say something about global publishing or Indian markets for books/films, or both?

The book? Brilliant. No other word for it. I had earlier reviewed Michael Lewis’s The Big Short and Hank Paulson’s On the Brink and said these two books along with Andrew Ross Sorkin’s Too Big to Fail comprise the best short list of volumes on the financial crisis. Your reviewer happily eats crow. Add Fault Lines to that list, maybe put it at the very top.

This is not because, as has been widely and justly noted, Raghuram Rajan was one of the very, very few who saw something was wrong (in 2005, and that too, speaking at a gathering that was paying tribute to Alan Greenspan) when almost everybody thought the god of high finance was in his heaven; some thought Greenspan was that god. That achievement, which puts Rajan in the class of Paul the Octopus, by itself doesn’t guarantee a fluidly written, beautifully argued and, this will apply if you think about these things seriously, a somewhat frightening thesis on the global economy. Even if you don’t follow economic or finance writings too much, and also especially if you don’t follow, please buy and read this book. Priced just shy of Rs 500 — roughly the price of two multiplex movie tickets — Fault Lines will give you a deeply satisfying experience. Am I over-praising? Am not. The publisher blurbs on the front cover a quote from the Economist book review: deserves to be widely read. Publisher’s blurbs automatically make you reach for the salt. But this one’s spot on. All thinking Indians who think, rightly, this country can make it big in the global economy should read this book. For, the problem for the global economy, as Rajan argues, is that some of the biggies were and are doing things that were and are crisis-friendly.

Full report here Indian Express

Raghuram Rajan on India’s ‘Fault Lines’

Chicago Booth economist Raghuram Rajan said he wanted to get past the “greedy bankers” and “lazy regulators” explanations for the economic crisis that slammed the U.S. in 2008. What he came up with: Income stagnation for the U.S. middle class.

Mr. Rajan, in his new book Fault Lines: How Hidden Fractures Still Threaten the World Economy, says American politicians on both sides of the aisle looked the other way as cheap housing credit flowed to people in the middle class, letting them own homes and consume at a level that their earnings wouldn’t have allowed (read the WSJ’s David Kessel on the book here).

“From the household perspective it means you’ve got consumption going up, wealth going up and you don’t focus on your stagnant income,” he said, calling it a “populist” solution to growing income inequality in the U.S. that both Democrats and Republicans could live with.

More difficult solutions would have involved figuring out how to increase jobs and real wages for workers with only high school degrees or how to increase education levels and skills to allow more Americans to qualify for higher-paying jobs.

Other economy watchers are also looking at the links between income inequality and financial crises as well as the links between income inequality and this particular crisis. The Global Policy Journal points to  a 2001 article that looked at how, even as U.S. income gaps widened over two decades, household consumption didn’t vary by as great a degree.

When he was in New Delhi on August 5 evening for the official release of the Indian edition of the book, which has an extra chapter on India, Mr. Rajan drew parallels between the two nations.

“There is a fundamental problem in India, which is that significant parts of the population are not benefiting from the growth process,” said Mr. Rajan. “This is very similar to what happened in the U.S.”

Full report here WSJ

New fault lines in the US economy

So many books have been written about the recent financial crisis that it would seem impossible to find one that has anything new to offer. One such is University of Chicago economist Raghuram Rajan’s latest book Fault Lines: How Hidden Fractures Still Threaten the World Economy.

Much of the previous discourse on the subject has pinned the blame for the crisis on bankers, regulators or government. These discussions have rarely, if ever, sought to get to the root cause of why people—particularly politicians— pressed the US Federal Reserve to support a low interest rate regime. Rajan does so by exploring causes other scholars have chosen to ignore, and describes some of these as “fault lines”.

The growth in income inequality in the US over the last 30 years emerges as the most critical of these. Rajan points out how the benefits of growth have accrued exclusively to the top 10% of the population, and how the rest, particularly the politically influential middle class between the 50th and 90th percentile of the population, have seen stagnation in real incomes. He juxtaposes this with the fact that an increased focus on profitability and global competition have meant that there has been a structural shift in unemployment in the US in the last 30 years. Whereas employment after a recession would recover within nine months, the recent recession has not recovered even after almost two years. These relatively anti-middle-class trends have been compounded by a system where social security benefits are small compared with those of other nations.

Full report here Mint 

'Many Indian billionaires have made money from proximity to govt'

The proliferation of dollar billionaires in India in recent years has often been cited as evidence of the country's growing economic might, but Raghuram Rajan, previously chief economist of the International Monetary Fund and now an economic advisor to the Prime Minister, describes this as a "dubious distinction".

In an exclusive interview to TOI, Rajan said he had no problems with wealth creation, "but I do think there is a problem if much of this wealth comes from proximity to government". Pointing out that India had the second largest number of billionaires per trillion dollars of GDP in the world (after Russia) prior to the crisis, and now possibly the largest, Rajan said "If you look at the areas where we have so many billionaires, many of them are not software entrepreneurs, it's things like land, real estate, natural resources and areas that require licences."

While conceding that some of these people have genuinely created entrepreneurial firms that have done wonderful things, in telecom for instance, Rajan added, "There are other areas which are less competitive and where proximity to government helps. That's a worrisome factor."

Full report here Times of India