Fault Lines: How Hidden Fractures Still Threaten the World Economy

Fault Lines: How Hidden Fractures Still Threaten the World Economy

Fault Lines: How Hidden Fractures Still Threaten the World Economy

Fault Lines: How Hidden Fractures Still Threaten the World Economy


Raghuram Rajan was one of the few economists who warned of the global financial crisis before it hit. Now, as the world struggles to recover, it's tempting to blame what happened on just a few greedy bankers who took irrational risks and left the rest of us to foot the bill. In Fault Lines, Rajan argues that serious flaws in the economy are also to blame, and warns that a potentially more devastating crisis awaits us if they aren't fixed.

Rajan shows how the individual choices that collectively brought about the economic meltdown--made by bankers, government officials, and ordinary homeowners--were rational responses to a flawed global financial order in which the incentives to take on risk are incredibly out of step with the dangers those risks pose. He traces the deepening fault lines in a world overly dependent on the indebted American consumer to power global economic growth and stave off global downturns. He exposes a system where America's growing inequality and thin social safety net create tremendous political pressure to encourage easy credit and keep job creation robust, no matter what the consequences to the economy's long-term health; and where the U. S. financial sector, with its skewed incentives, is the critical but unstable link between an overstimulated America and an underconsuming world.

In Fault Lines, Rajan demonstrates how unequal access to education and health care in the United States puts us all in deeper financial peril, even as the economic choices of countries like Germany, Japan, and China place an undue burden on America to get its policies right. He outlines the hard choices we need to make to ensure a more stable world economy and restore lasting prosperity.


The finanial collapse of 2007 and the recession that followed left many economists on the defensive. News programs, magazines, pundits, and even the Queen of England all asked some variant of the question, why didn’t you see it coming? Some in the economics community wrote articles or convened conferences to examine how they could have gotten it so wrong; others engaged in a full-throated defense of their profession. For many who were hostile to the fundamental assumptions of mainstream economics, the crisis was proof that they had been right all along: the emperor was finally shown to have no clothes. Public confidence in authority was badly shaken.

Of course, it is incorrect to say that no one saw this crisis coming. Some hedge fund managers and traders in investment banks put their money instead of their mouths to work. A few government and Federal Reserve officials expressed deep concern. A number of economists, such as Kenneth Rogoff, Nouriel Roubini, Robert Shiller, and William White, repeatedly sounded warnings about the levels of U.S. house prices and household indebtedness. Niall Ferguson, a historian, drew parallels to past booms that ended poorly The problem was not that no one warned about the dangers; it was that those who benefited from an overheated economy—which included a lot of people—had little incentive to listen. Critics were often written off as Cassandras or “permabears”: predict a downturn long enough, the thinking went, and you would eventually be proved right, much as a broken clock is correct twice a day. I know, because I was one of those Cassandras.

Every year, the worlds top central bankers get together for three days at Jackson Hole, Wyoming, along with private-sector analysts, economists, and financial journalists, to debate a set of topical papers commissioned for the event by the host, the Federal Reserve Bank of Kansas City. Following each day’s presentations, participants go on long hikes in the beautiful Grand Teton National Park, where, a mid the stunning mountain scenery, they talk central-banker . . .

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