Fault Lines: How Hidden Fractures Still Threaten the World Economy Hardcover – 24 May 2010
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Raghuram G. Rajan, Winner of the 2013 Deutsche Bank Prize in Financial Economics, The Center for Financial Studies
Winner of the 2010 Business Book of the Year Award, "Financial Times" and Goldman Sachs
Winner of the 2011 Gold Medal in Finance/Investment/Economics, Independent Publisher Book Awards
Winner of the 2010 PROSE Award in Economics, American Publishers Awards
Winner of the 2010 Gold Medal Book of the Year Award in Business & Economics, "ForeWord Reviews"
Finalist for the 2010 Paul A. Samuelson Award, TIAA-CREF
One of "strategy+business magazine"'s Best Business Books of the Year for 2010
Best Crisis Book by an Economist and Named one of "Bloomberg News"'s Thirty Business Books of the Year for 2010
One of "Financial Times"'s Books of the Year in Business & Economics, Nonfiction Round-Up for 2010
Finalist for the 2010 Book of the Year Awards in Business and Economics, "ForeWord Reviews"
Finalist for the 2011 Estoril Global Issues Distinguished Book Prize
"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"
"The left has figured out who to blame for the financial crisis: Greedy Wall Street bankers, especially at Goldman Sachs. The right has figured it out, too: It was government's fault, especially Fannie Mae and Freddie Mac. Raghuram Rajan of the University of Chicago's Booth School of Business says it's more complicated: Fault lines along the tectonic plates of the global economy pushed big government and big finance to a financial earthquake. To him, this was a Greek tragedy in which traders and bankers, congressmen and subprime borrowers all played their parts until the drama reached the inevitably painful end. (Mr. Rajan plays Cassandra, of course.) But just when you're about to cast him as a University of Chicago free-market stereotype, he surprises by identifying the widening gap between rich and poor as a big cause of the calamity."--David Wessel, "Wall Street Journal"
"[E]xcellent. . . . ["Fault Lines"] deserve[s] to be widely read in a time when the tendency to blame everything on catch-all terms like 'globalisation' is gaining ground."--"Economist"
"[C]onvincing."--Christopher Caldwell, "New York Times Magazine"
""Fault Lines" is a must-read."--Nouriel Roubini, "Forbes.com"
"What if the financial crash of 2008 was really caused by income inequality? Not greedy bankers, not reckless homeowners, but the ever widening-gulf between the rich and the poor? And what if the lack of social services--like health care--made things much, much worse? This is the startling new theory from Raghuram Rajan. . . . ["Fault Lines" is] especially fascinating because it mixes free-market Chicago School economics with good-government ideas straight out of Obamaland."--John Richardson, "Esquire.com"
"A high-powered yet accessible analysis of the financial crisis and its aftermath, "Fault Lines" was awarded the FT/Goldman Sachs Business Book of the Year. Rajan . . . was one of the few who warned that the crisis was coming and his book fizzes with striking and thought-provoking ideas."--"Financial Times" (FT Critics Pick 2010)
From the Inside Flap
"Fault Lines provides an excellent analysis of the lessons to be learned from the financial crisis, and the difficult choices that lie ahead. Of the many books written in the wake of our recent economic meltdown, this is the one that gets it right."--George A. Akerlof, coauthor of Animal Spirits and Identity Economics
"Amidst the welter of books about our financial crisis, Rajan's book stands out for several reasons: the author's intellectual distinction, his academic and real-world involvement in the problems of finance and the macroeconomy, his global perspective, his search for the roots of the financial crisis in America's growing economic inequality, and also his prescience. In 2005, Rajan foresaw the coming financial collapse--and was fiercely criticized for his insight."--Richard A. Posner, author ofA Failure of Capitalism: The Crisis of '08 and the Descent into Depression
"Beautifully clear, cogent, and highly readable. This is the best book out there on the global imbalances that gave us the last financial crisis and might well give us the next one."--Kenneth S. Rogoff, coauthor ofThis Time Is Different: Eight Centuries of Financial FollySee all Product description
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The book isn't a bad read although the dogmatism can be frustrating at times. I just wouldn't recommend it as a first or stand alone exploration of the great recession. It does make a decent companion book/counterpoint to better works on the topic such as: Stiglitz's Freefall or Cassidy's How Markets Fail
Sadly, I don't think the fault lines will be fixed any time soon. And worst of all, it will be poor savers in poor countries who will have to bail out the feckless babyboomers in rich countries. (Again.)
Why? Because the relationship between savers and spenders is toxic. Rich Europeans and Americans have a very low savings rate, democratic power to resist taxes, and have voted generous welfare programmes to allow themselves greater spending. New money in developing countries has a sky high savings rate. Meanwhile, the traditional flow of money (except for the rich) has reversed. Everyone now wants and expects to be independent of their children in old age, even to leave a legacy. (A real one, but for most it will be a legacy of debt.)
There are three principal reasons for this. First, democracy. The West can pander to the voters, the East can deny the populace even basic healthcare if they are authoritarian enough. Second, demographics. If you have no welfare, only one child (forcibly, sometimes) and a mobile population, you will be dependent on savings, not family, not state, in your old age. So you save like crazy. Third, demographics again. Urbanising and developing countries, not to mention Germany and Italy, have plummeting birth rates and the population explosion is likely to be a population implosion in a couple of generations.
The implications of this for today are obvious to an economist: Savers one side, spenders the other, and we have a huge balance of trade problem. In fact it's so huge that the debt and the surplus go together purely mechanically.
Solutions to this might include more democracy, less abortion, providing social safety nets in developing countries, and so forth. I fear it may mean less social spending in developed countries as this seems the only way to get the savings rate up.
The author's solution to this fault line? More social spending in America, by extending the period you can draw an unemployment pay cheque. While I have sympathy for the unemployed, this is just tinkering at the margins.
In summary, good analysis, trivial solutions.
He begins with an excellent recap of the two models of development, (failed) "import-substitution" (India-style) or (successful) export-promotion (Taiwan-style). He develops this argument later in the book with relation to China's rise.
The import-substitution model was popular in Rajan's native India, and also Brazil; countries with a large domestic market. The thinking is to develop "infant industries" protected behind barriers . The problem with this model is that industries grow fat and lobby politicians to continue their subsidies/protection forever.
This model does not work well for smaller economies; Hong Kong, Singaporean or Taiwanese industries know that selling to their domestic markets alone were too small. They opted for export-promotion models.
These export-promotion economies have a "producer bias" in which government policies are skewed towards business (at the expense of wage-earners).
- Interest rates are typically held low to provide cheap finance (which contributes to the astonishing growth in Investment in the E Asian miracle) - to the detriment of savers.
- Currencies are held low - encouraging exports, while making imports relatively expensive - to the detriment of consumers.
- Labour policies favour business - keeping wages low.
Combined, these policies generate low domestic consumption - and a miserable population - which is why they are usually only possible in countries with low levels of democracy.
This is the path model that China is taking. But with one important difference: the E Asian countries borrowed from abroad to finance their investment boom. The 1997 crash taught China the risk of this; indeed their money would flow from East to West, not vice versa.
While Asia was developing along these lines over the past 30 years, the US (he skips over Europe, though the arguments are similar) was seeing the impact of globalisation. From 1976-1997 for each $1 wealth generated, 58 cents went to America's richest 1%. This scale of inequality growth was almost unprecedented.
To win elections, US Presidents had to introduce a "consumer bias" in the way that Asians had a "producer bias". One policy was to encourage homeownership and keep prices going up, so that although most people's wages were not rising, their assets were (e.g. Fannie May and Freddie Mac were mandated to give more and more loans to poorer and poorer people throughout the 90s). Similarly, the "Greenspan Put" (the Fed would not prick equity bubbles, but it would do all it good to stop equity crashes) made the stock market a one way bet. Furthermore, the strong dollar and low tariff policy meant consumers could buy cheap imports - another way to keep the people with stagnant wages happy.
Cheap Chinese money flowing to the USA "gave the rope for them to hang themselves with". They lent Americans money to buy their exports. This is pretty much how the world remains today.
His final chapters (which are his weakest) give a familar account of the 2008 crisis - I found little in them that you wouldn't know from keeping up to date with the FT's op-ed pages. He has an unconvincing stab at solutions (not that anyone else has good solutions either). The strength of this book is his insightful analysis of the fault-lines which caused - and remain - at the heart of the global economy.