Rajan's analysis of the "fault lines" threatening the American economy is subtle and interesting. To his credit, he does not take an easy partisan line but rather thinks deeply and originally about our economic problems.
He argues essentially that much of what went wrong the last few years was due not to irrationality but to skewed incentives. Like a lot of conservatives, Rajan pins a lot of the blame on government policies, including the easy money policy of the Fed and the push to extend credit to low income people. He also emphasizes the global imbalances which led to huge inflows of capital into the US from China, Saudi Arabia, etc...
But Rajan doesn't stop there. Instead, he points to a deeper structural problem in the economy: namely the stagnation of wages for the middle class and lower classes and the widening of inequality in recent decades. This, he argues at length, is what led to the policies that created the housing bubble. Politicians were desperate to give their constituents something to make them feel wealthier--and that something turned out to be easy credit and rising home prices.
Rajan proposes a lot of reforms, including some aimed at diminishing the moral hazard that pervades our financial system. But he also suggests a strengthening of the social safety net, so that people get some protection from the vicissitudes of the economy and politicians do not feel as much pressure to do haphazard things ad hoc to try to address rising unemployment.
And, crucially, he points out the need for education reforms aimed at giving parents more choice in their kids' education and making teachers and schools more accountable to their customers. For the best way to help people who start life at the bottom is to give them the kind of skills and training they need to get good jobs and rise out of poverty.
I don't agree with all of Rajan's book, but it's a serious reflection on our economy. If only more people would read this book, American policy might take a more intelligent course. No thoughtful person will come away from reading this book believing that markets are always right, or that government is always the solution. Sadly these are the positions usually espoused by conservatives and progressives respectively on cable news and in newspaper op/eds.
He argues essentially that much of what went wrong the last few years was due not to irrationality but to skewed incentives. Like a lot of conservatives, Rajan pins a lot of the blame on government policies, including the easy money policy of the Fed and the push to extend credit to low income people. He also emphasizes the global imbalances which led to huge inflows of capital into the US from China, Saudi Arabia, etc...
But Rajan doesn't stop there. Instead, he points to a deeper structural problem in the economy: namely the stagnation of wages for the middle class and lower classes and the widening of inequality in recent decades. This, he argues at length, is what led to the policies that created the housing bubble. Politicians were desperate to give their constituents something to make them feel wealthier--and that something turned out to be easy credit and rising home prices.
Rajan proposes a lot of reforms, including some aimed at diminishing the moral hazard that pervades our financial system. But he also suggests a strengthening of the social safety net, so that people get some protection from the vicissitudes of the economy and politicians do not feel as much pressure to do haphazard things ad hoc to try to address rising unemployment.
And, crucially, he points out the need for education reforms aimed at giving parents more choice in their kids' education and making teachers and schools more accountable to their customers. For the best way to help people who start life at the bottom is to give them the kind of skills and training they need to get good jobs and rise out of poverty.
I don't agree with all of Rajan's book, but it's a serious reflection on our economy. If only more people would read this book, American policy might take a more intelligent course. No thoughtful person will come away from reading this book believing that markets are always right, or that government is always the solution. Sadly these are the positions usually espoused by conservatives and progressives respectively on cable news and in newspaper op/eds.