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