Love the Bank, Hate the Banker

Date: 27-03-2013
Source: Project Syndicate

NEW DELHI – Public discourse is rarely nuanced. The public’s attention span is short, and subtleties tend to confuse. Better to take a clear, albeit incorrect, position, for at least the message gets through. The sharper and shriller it is, the more likely it is to capture the public’s attention, be repeated, and frame the terms of debate.

Consider, for example, the debate about bank regulation. Bankers are widely reviled today. But banking is also mystifying. So any critic who has the intellectual heft to clear away the smokescreen that bankers have laid around their business, and can portray bankers as both incompetent and malevolent, finds a ready audience. The critic’s message – that banks need to be cut down to size – resonates widely.

Bankers can, of course, ignore their critics and the public, and use their money to lobby in the right quarters to maintain their privileges. But, every once in a while, a banker, tired of being portrayed as a rogue, lashes out. He (it is usually a man) warns the public that even the most moderate regulations placed on banks will bring about the end of civilization as we know it. And so the shrillness continues, with the public no wiser for it.

Einkommensschere “Amerika muss endlich aufwachen”

Der Chicago-Ökonom Raghuram Rajan sieht in der Einkommensungleichheit in den USA die Ursache der Finanzkrise. Im Interview kritisiert er die Geldpolitik der Notenbank.

• Von: Malte Fischer, Wirtschaftswoche
• Datum: 10.02.2011 – 18:29 Uhr

Frage: Professor Rajan, vor einigen Tagen hat die US-Untersuchungskommission zur Finanzkrise ihren Bericht vorgelegt. Die Mitglieder streiten, ob die Krise auf Markt- oder Staatsversagen zurückzuführen ist. Wer hat recht?

Raghuram Rajan: Die Wahrheit liegt wie so häufig in der Mitte. In den USA hat die Regierung jahrelang die halbstaatlichen Kreditfinanzierer Fannie Mae und Freddie Mac gedrängt, bonitätsschwachen Bürgern den Kauf eines Hauses zu ermöglichen. Dazu haben Fannie und Freddy die von privaten Geschäftsbanken an bonitätsschwache Kunden vergebenen Kredite angekauft, gebündelt und in verbriefter Form weitergereicht. Die Geschäftsbanken machten mit, weil sie daran gut verdienten.

Frage: Welche Rolle hat die US-Notenbank Fed gespielt?

Rajan: Die Fed hat die Leitzinsen in der Zeit von 2001 bis 2004 niedriger gehalten, als es angesichts des Wachstums der US-Wirtschaft angemessen war. Dadurch hat sie den Kreditboom verlängert und zur Preisblase am Immobilienmarkt beigetragen.

Frage: Jetzt hält die Fed die Zinsen wieder extrem niedrig…

Rajan: …und begeht damit den gleichen Fehler wie damals. Auch diesmal orientiert sie sich in erster Linie an der Situation auf dem US-Arbeitsmarkt, wo die Arbeitslosigkeit noch immer hoch ist. Weil die Fed mit ihren Zinsentscheidungen faktisch den Leitzins für die gesamte Weltwirtschaft vorgibt, sind die Zinsen nicht nur für die USA, sondern auch für viele andere Länder zu niedrig.

Frage: Aber die Fed hat – anders als etwa die Europäische Zentralbank (EZB) – die gesetzliche Aufgabe, neben stabilen Preisen auch einen hohen Beschäftigungsstand zu gewährleisten.

Is a concentration of wealth at the top to blame for financial crises?

Date: 21-03-2012
Source: The Economist
Subject: Body of evidence

Is a concentration of wealth at the top to blame for financial crises?

IN THE search for the villain behind the global financial crisis, some have pointed to inequality as a culprit. In his 2010 book “Fault Lines”, Raghuram Rajan of the University of Chicago argued that inequality was a cause of the crisis, and that the American government served as a willing accomplice. From the early 1980s the wages of working Americans with little or no university education fell ever farther behind those with university qualifications, he pointed out. Under pressure to respond to the problem of stagnating incomes, successive presidents and Congresses opened a flood of mortgage credit.

In 1992 the government reduced capital requirements at Fannie Mae and Freddie Mac, two huge sources of housing finance. In the 1990s the Federal Housing Administration expanded its loan guarantees to cover bigger mortgages with smaller down-payments. And in the 2000s Fannie and Freddie were encouraged to buy more subprime mortgage-backed securities. Inequality, Mr Rajan argued, prepared the ground for disaster.

Is Inflation the Answer?

Fault Lines by Raghuram Rajan

‎Montag, ‎15. ‎August ‎2011, ‏‎19:59:53

We have just experienced financial panic. Paradoxically, a downgrade of U.S. debt has triggered a flight to liquidity towards the assets that have been downgraded. Ultimately, the cure for financial market paranoia is strong economic growth. Recently, a number of commentators have proposed a sharp contained bout of inflation as a way to reenergize growth in the United States, and the rest of the industrial world. Are they right?

To understand the prescription, we have to understand the diagnosis. As Reinhart and Rogoff argue, recoveries from crises that result in over-leveraged balance sheets are slow, and are typically resistant to traditional macroeconomic stimulus. Over-levered households cannot spend, over-levered banks cannot lend, and over-levered governments cannot stimulate. So, the prescription goes, why not generate higher inflation for a while? This will surprise fixed income lenders who agreed in the past to lend long term at low rates, will bring down the real values of debt, eliminate debt “overhang”, and get growth going again. While an attractive solution at first glance, a closer look suggests serious concerns. The key questions are: Can central banks generate sharply higher inflation for while? Will it work as advertised? What could be the unintended consequences? Are there better alternatives?

Don’t let another politician run the IMF

Rajan ist nicht irgendwer: Wurde von den Wirtschaftsspezialisten des “Economist” als wichtigster Ökonom eingestuft, schrieb das “Business Book of the Year” 2010 (Fault Lines), war Chefökonom des IWF (hfk)

By Raghuram Rajan

Published: May 19 2011 22 , FT

Following Dominique Strauss-Kahn’s resignation, the International Monetary Fund needs a new head. There is much talk of the candidate’s nationality but much less about another vital issue: that the fund’s next leader should not be an active politician.

The case for a politician, especially a European politician, at first seems strong. Many of the fund’s largest programmes are in Europe. The new head must enjoy the confidence of European leaders if they are to have hope of forging consensus among them. He or she also needs to understand the nuances of European politics, to avoid pressing for genuinely infeasible actions.

The most able candidates may even want the job as a path to political redemption, or a stepping stone towards higher office. Yet these are precisely the reasons why someone whose primary skill is political would be an unwise choice. The fund is designed to push tough policies to straighten out countries that have mismanaged finances, not win a popularity contest.

When it colludes with politicians to propose politically palatable programmes, the IMF fails in its proper role of reforming a country. It does a disservice to that nation’s citizens and private creditors, and to the taxpayers across the world who provide IMF funding. The fund plays its role better when it becomes the scapegoat politicians blame, rather than when it wants to be loved.

Politics When Govts Cannot Spend

Raghu Rajan Blog, 10/4

CHICAGO – Democratic governments are not incentivized to take decisions that have short-term costs but produce long-term gains, the typical pattern for any investment. Indeed, in order to make such investments, democracies require either brave leadership or an electorate that understands the costs of postponing hard choices. 

Brave leadership is rare. So, too, is an informed and engaged electorate, because the expert advice offered to voters is itself so confusing. Economists of different persuasions find it difficult to reach a consensus about the necessity of any policy. Consider, for example, the cacophony of arguments about government spending: is it the only thing keeping depression at bay, or is it moving us steadily down the road to perdition? The debate does not lead to agreement, moderate voters do not know what to believe, and the result is that policy choices follow the path of least resistance – until they run into a brick wall.

The Slump Goes On

The Slump Goes On: Why?

September 30, 2010, Paul Krugman and Robin Wells

Fault Lines: How Hidden Fractures Still Threaten the World Economy
by Raghuram G. Rajan
Princeton University Press, 260 pp., $26.95

Crisis Economics: A Crash Course in the Future of Finance
by Nouriel Roubini and Stephen Mihm
Penguin, 353 pp., $27.95

The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession
by Richard C. Koo
Wiley, 296 pp., $45.00

Nouriel Roubini; drawing by John Springs

In the winter of 2008–2009, the world economy was on the brink. Stock markets plunged, credit markets froze, and banks failed in a mass contagion that spread from the US to Europe and threatened to engulf the rest of the world. During the darkest days of crisis, the United States was losing 700,000 jobs a month, and world trade was shrinking faster than it did during the first year of the Great Depression.

Fault Lines: How Hidden Fractures Still Threaten the World Economy

Damit hat es Raghu Rajan zum “berühmtesten Ökonomen 2011″ lt. Economist gebracht.

Like geological fault lines, the fissures in the world economic system are more hidden and widespread than many realize, he says. And they are potentially more destructive than other, more obvious culprits, like greedy bankers, sleepy regulators and irresponsible borrowers. Mr. Rajan . . . argues that the actions of these players (and others) unfolded on a larger world stage, that was (and is) subject to the imperatives of political economies. . . . [A] serious and thoughtful book. — New York Times

In a new book . . . entitled Fault Lines, Rajan argues that the initial causes of the breakdown were stagnant wages and rising inequality. With the purchasing power of many middle-class households lagging behind the cost of living, there was an urgent demand for credit. The financial industry, with encouragement from the government, responded by supplying home-equity loans, subprime mortgages, and auto loans. . . . The side effects of unrestrained credit growth turned out to be devastating–a possibility most economists had failed to consider. — John Cassidy, New Yorker

The book, published by Princeton University Press, saw off stiff competition from five others on the shortlist, to be chosen as ‘the most compelling and enjoyable’ business title of 2010. The final intense debate among the seven judges came down to a choice between Fault Lines and Too Big to Fail, Andrew Ross Sorkin’s acclaimed minute-by-minute analysis of the collapse of Lehman Brothers. The book identifies the flaws that helped cripple the world financial system, prescribes potential remedies, but also warns that unless policymakers push through painful reforms, the world could be plunged into renewed turmoil. — Financial Times

Why Did Economists Miss the Crisis?

Anantha Nageswaran, RGE Monitor, Feb 11, 2011 12:12PM

Raghuram Rajan at the Chicago University Booth School of Business. He is not in their Economics Department. He was chosen by fellow economists as the economist with the most important ideas in a post-crisis world. See here (ht: Ram Narayan).  Hence, his comments carry significance. His latest blog post is on the question of why economists failed to see the crisis of 2008. [It is a different story as to whether the y would see the crisis of 2012 coming] 

 

Influential economists

The contemporary Keynes

Which economist is doing most to shape post-crisis thinking?

Feb 10th 2011 | Washington, DC | from PRINT EDITION, The Economist

DISMAL economies are often dismal for economists. Respected figures find themselves defending discredited theories or justifying why they failed to see trouble coming. But calamity can also clear paths for new ideas. The Depression was the backdrop for the work of John Maynard Keynes. The stagflationary 1970s vindicated Milton Friedman: a generation of liberalisation followed.

The Economist asked members of “Economics by invitation”, our online forum of more than 50 prominent economists, to nominate colleagues with the most important ideas for a post-crisis world. The respondents came up with nearly 20 different names. None won an absolute majority, but a few cropped up more often than others (see table).