Sensible Perspectives

Fault Lines by Raghuram Rajan

Posted by on November 19, 2014

Fault Lines explores the causes of the financial crisis of 2007-2009. Raghuram Rajan is an accomplished political economist. He currently serves as Governor of the Reserve Bank of India – the chief executive of India’s central bank (something like the Janet Yellen of India). He is on leave from his position as Professor of Finance at the University of Chicago, Booth School of Business. He was Chief Economist of the International Monetary Fund from 2003-2006.

As the title suggests, Rajan argues that a small number of severe systemic misalignments or fault lines collectively account for the crisis. Some of these misalignments are specific to the US, and some apply to economic relations among countries. Specifically, he links the growing perception of economic inequality in the US to politically encouraged easier credit for consumers. He draws a straight line between “too big to fail” and the immoderate risk-taking by US banks prior to the crisis. Finally, the export focus of some countries and the consumer focus of others engender the close connections that allowed a US financial crisis to infect the entire economic world.

Fault Lines offers a very broad perspective on the interactions between politics and economics. The book is not at all mathematically technical (there are no equations, and few numbers), but it is fairly dense. As you begin, you may agree with Alice, “What is the use of a book without pictures or conversations?”1

However, I suspect that you will find that the book repays your reading effort. Rajan provides a rich description of the forces that led to the crisis. You may gain a better-informed perspective on much of the news emanating from New York and Washington. And “surface” political rhetoric may come to seem far more penetrable.

In short, Fault Lines is a compelling story of the financial crisis. Readers will never see the world quite the same way again.

1<http://en.wikiquote.org/wiki/Alice’s_Adventures_in_Wonderland>