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Fault Lines: How Hidden Fractures Still Threaten the World Economy Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram G. Rajan
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“Not taking risks one doesn't understand is often the best form of risk management.”
Raghuram G. Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy
“And more than the quality of its institutions, what distinguishes a developed country from a developing one is the degree of consensus in its politics, and thus its ability to take actions to secure a better future despite short-term pain.”
Raghuram G. Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy
“A forced equalization of wages that disregards the marginal contributions of different workers will deaden incentives and lead to a misallocation of resources and effort.”
Raghuram G. Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy
“I thought there might be some grand design I did not understand, but the government’s policy clearly was not working, because India was still poor. I was determined to learn more, so I became interested in economics. This book is another unintended consequence of the government’s policies.”
Raghuram G. Rajan, Fault Lines
“Nationalism, coupled with great faith in the power of the government to enact domestic bargains between labor and capital, has been seen before: it was called fascism then.”
Raghuram G. Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy
“We have long understood that it is not income that matters but consumption. Stripped to its essentials, the argument is that if somehow the consumption of middle-class householders keeps up, if they can afford a new car every few years and the occasional exotic holiday, perhaps they will pay less attention to their stagnant monthly paychecks.”
Raghuram G. Rajan, Fault Lines
“Cynical as it may seem, easy credit has been used as a palliative throughout history by governments that are unable to address the deeper anxieties of the middle class directly.”
Raghuram G. Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy
“Excessive rural credit was one of the important causes of bank failure during the Great Depression.”
Raghuram G. Rajan, Fault Lines
“they will naturally focus only on dealing with a few scapegoats, not just because the system is harder to change, but also because if politicians traced the fault lines, they would find a few running through themselves.”
Raghuram G. Rajan, Fault Lines
“mind is a terrible thing to waste, and the United States is wasting too many of them.”
Raghuram G. Rajan, Fault Lines
“The picture of bankers slavering after bonuses soon after they had been rescued by government bailouts was not only outrageous but also pitiable - pitiable because they were clamoring for their primary measure of self-worth and status to be restored”
Raghuram G. Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy
“For example, Shawn Cole, a professor at Harvard Business School, finds that Indian state-owned banks increase their lending to the politically important but relatively poor constituency of farmers by about 5 to 10 percentage points in election years.51 The effect is most pronounced in districts with close elections. The consequences of the lending are greater loan defaults and no measurable increase in agricultural output, which suggest that it really serves as a costly form of income redistribution.”
Raghuram G. Rajan, Fault Lines
“Politicians today vow, “Never again!” But they will naturally focus only on dealing with a few scapegoats, not just because the system is harder to change, but also because if politicians traced the fault lines, they would find a few running through themselves.”
Raghuram G. Rajan, Fault Lines
“the willingness to be ruthless helps innovation.”
Raghuram G. Rajan, Fault Lines
“The eventual aim was to build a 4,000-acre high-tech park, called Alpha Technopolis, to rival Taiwan’s famous Hsinchu Science-Based Industrial Park. The vision was grand, perhaps overly so.”
Raghuram G. Rajan, Fault Lines
“Past experience and relationships are of little value in driving radical innovation: indeed, because the natural human tendency is to do more of the same and to serve existing clients and needs well, past relationships can be positively detrimental.”
Raghuram G. Rajan, Fault Lines
“Apart from the added efficiency, the willingness to be ruthless helps innovation. Past experience and relationships are of little value in driving radical innovation: indeed,”
Raghuram G. Rajan, Fault Lines
“By focusing only on jobs and inflation—and, in effect, only on the former— the Fed behaved myopically, indeed politically.”
Raghuram G. Rajan, Fault Lines
“The personal checks and balances that most of us bring to bear when we are employed in other activities - we ask ourselves if we are producing a socially useful product - operate less well in finance because, with few exceptions, making money is the Raison d'être (reason for existence) for the financier”
Raghuram G. Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy
“the loan”
Raghuram G. Rajan, Fault Lines
“a dollar’s worth of physical capital in India would produce 58 times the returns available in the United States. Global financial markets, he argued, could not be so blind as to ignore these enormous differences in returns, even taking into account the greater risk of investing in India.”
Raghuram G. Rajan, Fault Lines
“Once I saw this trend, the paper quickly wrote itself and was titled “Has Financial Development Made the World Riskier?” As the Wall Street Journal reported in 2009 in an article on my Jackson Hole presentation: Incentives were horribly skewed in the financial sector, with workers reaping rich rewards for making money but being only lightly penalized for losses, Mr. Rajan argued. That encouraged financial firms to invest in complex products, with potentially big payoffs, which could on occasion fail spectacularly. He pointed to “credit default swaps” which act as insurance against bond defaults. He said insurers and others were generating big returns selling these swaps with the appearance of taking on little risk, even though the pain could be immense if defaults actually occurred. Mr. Rajan also argued that because banks were holding a portion of the credit securities they created on their books, if those securities ran into trouble, the banking system itself would be at risk. Banks would lose confidence in one another, he said. “The inter-bank market could freeze up, and one could well have a full-blown financial crisis.” Two years later, that’s essentially what happened.2 Forecasting at that time did not require tremendous prescience: all I did was connect the dots using theoretical frameworks that my colleagues and I had developed. I did not, however, foresee the reaction from the normally polite conference audience. I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions. As I walked away from the podium after being roundly criticized by a number of luminaries (with a few notable exceptions), I felt some unease. It was not caused by the criticism itself, for one develops a thick skin after years of lively debate in faculty seminars: if you took everything the audience said to heart, you would never publish anything. Rather it was because the critics seemed to be ignoring what was going on before their eyes.”
Raghuram G. Rajan, Fault Lines
“This is a convenient focus, because the villains are easily identified and measures can be taken against malfeasance and neglect. What’s more, it absolves the rest of us of our responsibility for precipitating this crisis. But this is too facile a response.”
Raghuram G. Rajan, Fault Lines
“In most markets, savvy investors can take a contrarian position when prices depart too much from fundamental value. In the housing market (as well as in the market to take firms private), few opportunities exist for investors to take a short position—that is, sell houses they do not have so as to make a killing when prices fall. This typically means that the optimist, who buy housing, tend to have undue influence.14 So house prices, and more generally, asset prices, can rise excessively, and their reacquaintance with reality can be brutal indeed.”
Raghuram G. Rajan, Fault Lines
“These inefficiencies as well as limited competition result in an enormous interest spread (the difference between the bank’s lending rate and its cost of funds): in”
Raghuram G. Rajan, Fault Lines