Bart's Reviews > Fault Lines: How Hidden Fractures Still Threaten the World Economy

Fault Lines by Raghuram G. Rajan
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Oct 02, 11

Read from September 19 to October 02, 2011

This is a gently persuasive book by a reasonable and well-informed intellectual. It is a commentary on the times that such a thing as this would be remarkable.

Raghuram Rajan's writing in Fault Lines is most persuasive as he addresses the events that led to Sept. 18, 2008 - specifically the race in the financial sector to attain "systemic risk" status, so as to tout government intervention in tacit sales pitches to investors. His recommendations for regulatory reform are excellent. His recommendations for how to address America's disparity of wealth are considerably less so.

After providing a realistic view of what happens whenever a sophisticated and amoral free-market system competes for government funds, Rajan lays out interesting ideas about regulations. They must be temporary in nature and triggered by events, Rajan posits, else financial institutions will commit massive resources to navigating around them. And because they are temporary and triggered - regulations that take effect in emergencies, in other words - the shortsighted financial industry is unlikely to protest them. Surely, their thinking will go, this sort of thing will never happen.

Rajan's most inventive idea is to require a living will from financial institutions that fancy themselves too big to fail. Since most of free-market capitalism, anymore, is a matter of federal-funds-capture, the government should have lots of leverage with banks in demanding this. "Provide a way to dissolve your company over a weekend, in the event of a catastrophe," the requirement would go, "or receive no federal protection."

All this wisdom and innovative thought by Rajan, though, leads a reader to expect more when the subject turns to remedying America's accelerating wealth disparity. Unfortunately, Professor Rajan offers little more than education as remedy. Send everyone to college!

While this might work in individual instances - a lad who acquires a master's degree wins better compensation than his dropout peer - it is a nonstarter for a country. The disparity, unless addressed, will remain; education is a fairly arbitrary way of establishing compensation to begin with - and what makes Rajan think that, on the day every American has a master's degree, some other arbitrary justification for inequality won't be hatched?

All in all, this book is worth the read, though. Rajan deserves praise for his gentle presentation at least.
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