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Fault Lines: How Hidden Fractures Still Threaten the World Economy (edition 2011)

by Raghuram G. Rajan (Author)

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Member:mortybooks2
Title:Fault Lines: How Hidden Fractures Still Threaten the World Economy
Authors:Raghuram G. Rajan (Author)
Info:Princeton University Press (2011), Edition: With a New afterword by the author, 280 pages
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Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram G. Rajan

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Showing 5 of 5
An interesting and well ordered look at the causes and consequences of the financial crisis from a mainstream but non New Keynesian approach. Its focus on the role of government agencies in the fostering of the housing boom alone makes it worthwhile. ( )
  JohnPhelan | Nov 9, 2015 |
Raghuram Rajan is the hands down co-winner of the best title for any economics book in recent years: Saving Capitalism from the Capitalists. It was also a very good book.

Relative to this stellar predecessor, Fault Lines was a disappointment. The thesis is that a number of fault lines contributed to the financial crisis and continue to leave us vulnerable. In Rajan's view these include: (i) inequality which led to encouraging over-borrowing as a palliative; (ii) a system without automatic stabilizers that leads the Fed to overreact with overly low, bubble-causing interest rates during downturns; (iii) faulty financial regulation and corporate governance that breeds and exacerbates bubbles; and (iv) global macroeconomic imbalances.

In some cases the diagnosis seems apt, in others I would much more strongly disagree, but most of them are reasonably predictable -- albeit it would be hard to predict that any one person would share this eclectic a set of views.

Rajan proposes solutions to most of these fault lines, some of which seem more commensurate to the challenge than others. The most interesting is the notion that the economy would be less bubble prone if it had a more robust social safety net, including health insurance (which we now have), automatically extended unemployment insurance, etc.

As to the disappointment, it stems partly from thinking some of Rajan's arguments are tendentious (e.g., putting disproportionate blame on the government's home ownership policies for the subprime meltdown) and some are pretty obvious. The book is also marred from too many three-page literature summaries of everything from the causes of inequality to universal health care where Rajan does not have as much to add as he does in areas closer to his specialization like finance. ( )
  nosajeel | Jun 21, 2014 |
Raghuram Rajan’s Fault Lines is the best book on the financial crisis that I have read thus far. Here’s why.

First, Rajan does not claim that there was a single causa causans. There wasn’t – it was a toxic cocktail that brought us the crisis. Many writers, pundits and ideologues have thought to promote their pet ideas by assigning them special, even exclusive, status in that mix. The result of this orgy of (self-) promotion of overly simplistic views is a lot of heat but little light. I understand, but am not sympathetic to, the tendency to oversimplify.

Humans have a natural tendency to simplify existential threats by turning them into dichotomies. I think it is because, when we are faced with a threat to survival, we rely then on our instinctual (automatic) assessment mechanisms. Those mechanisms reduce our decision machinery to a dichotomous choice – is this good or bad, do I fight or run, do I swerve right or left, do I withdraw all my cash from the bank or do I trust the system to work as promised. Viewing a threat as multifaceted, collecting data, building (conceptual) models, weighing the trade-offs, and engaging in informed discussion is not a successful strategy for survival when faced with a perceived immediate life-threatening situation.

In addition, we simplify because complex dynamics don’t have solutions most of the time, and we have a strong preference for problems with solutions, even if they are irrelevant to understanding the actual problem at hand, because (a) they give us a feeling of control and (b) they get you published in an academic journal (if that is your sort of thing).

Reductionism – which permeates the literature on the crisis – doesn’t provide much help either understanding the dynamics that led to the crisis or therefore, deciding how to modify behavior going forward.

Second, Rajan does not give a free pass to any group of actors who contributed to the development of the crisis, including especially politicians and regulators.

To treat, as many have done, the ruling or governing class of actors as an inconsequential aspect of the crisis is to vastly misunderstand the role of politics in human affairs generally. The attention Rajan gives to their role in the crisis seems almost excessive until, upon reflection, it becomes clear that this only seems so because it is a factor that is treated so rarely, lightly, or dismissively in most other books on the crisis.

Third, again unlike many other books on the crisis, there is no substitution of appeal to emotion for appeal to reason. And the reasoning is (in most cases) reasonable. Its OK to be angry, but emotion does not serve well as a tool of analysis. That is not to say that Rajan has no opinions. He makes those quite clear. The intellectual parapets on which he stands are also clear.

The last three chapters contain Rajan’s prescription for the future. Here the book shares with the rest of the batch of crisis book writers a fall-off in quality, not so steep a fall-off as in many other books. The reason is obvious – Rajan doesn’t have an answer to the question, what do we do about this going forward (I doubt there is an answer). Yet because every author (or editor, or the public) requires one (see my point above), Rajan provides one while, to a lesser extent than most, employing rhetoric, partial solutions, and ad hoc arguments.

I haven’t said much about what is actually in the book, and I guess I won’t say much. The book has a very interesting, provocative and non-consensus starting point, specifically, that peculiarities of the social contract in the United States lead the ruling or governing class to prefer certain policy responses which helped light the fire under the crisis.

Rajan’s book is a very interesting companion to Dani Rodrik’s book, The Globalization Paradox, which I have previously mentioned on my belranto.tumblr.com blog. It is not that they agree. Actually, I think Rodrik and Rajan could get into a fistfight over the role of international organizations like the IMF and World Bank. But the intellectual bases of the two books are complementary, and where they contrast they inspire thought.
  GloriaMundi | Mar 28, 2013 |
A book on the crisis by an economist who saw it coming (another one of those).
Hugely influential, widely debated, yet I am unimpressed. The writing is trite, most of the arguments have been exposed elsewhere, and the core thesis of the book - inequalitiy is at the root of the crisis - is given a perverse twist. In effect, it reads as if the problem is not inequality per se, but the 'misguided' attempts by politicians to remedy it using credit. Fits too easily into the narratives of the right ("it was the politicians fault!" "the poor have nobody to blame but themselves!") to be honest. ( )
  raphy_raph | Feb 17, 2011 |
Raghuram Rajan is the hands down co-winner of the best title for any economics book in recent years: Saving Capitalism from the Capitalists. It was also a very good book.

Relative to this stellar predecessor, Fault Lines was a disappointment. The thesis is that a number of fault lines contributed to the financial crisis and continue to leave us vulnerable. In Rajan's view these include: (i) inequality which led to encouraging over-borrowing as a palliative; (ii) a system without automatic stabilizers that leads the Fed to overreact with overly low, bubble-causing interest rates during downturns; (iii) faulty financial regulation and corporate governance that breeds and exacerbates bubbles; and (iv) global macroeconomic imbalances.

In some cases the diagnosis seems apt, in others I would much more strongly disagree, but most of them are reasonably predictable -- albeit it would be hard to predict that any one person would share this somewhat eclectic sets of views.

Rajan proposes solutions to most of these fault lines, some of which seem more commensurate to the challenge than others. The most interesting is the notion that the economy would be less bubble prone if it had a more robust social safety net, including health insurance (which we now have), automatically extended unemployment insurance, etc.

As to the disappointment, it stems partly from thinking some of Rajan's arguments are tendentious (e.g., putting disproportionate blame on the government's home ownership policies for the subprime meltdown) and some are pretty obvious. The book is also marred from too many three-page literature summaries of everything from the causes of inequality to universal health care where Rajan does not have as much to add as he does in areas closer to his specialization like finance. ( )
  jasonlf | Oct 31, 2010 |
Showing 5 of 5
While it’s a story that ties everything up in one neat package, however, it’s strongly at odds with the evidence. And it’s disappointing to see Rajan, a widely respected economist who was among the first to warn about a runaway Wall Street, buy into what is mainly a politically motivated myth.
 
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Amazon.com Product Description (ISBN 0691146837, Hardcover)

Raghuram Rajan was one of the few economists who warned of the global financial crisis before it hit. Now, as the world struggles to recover, it's tempting to blame what happened on just a few greedy bankers who took irrational risks and left the rest of us to foot the bill. In Fault Lines, Rajan argues that serious flaws in the economy are also to blame, and warns that a potentially more devastating crisis awaits us if they aren't fixed.

Rajan shows how the individual choices that collectively brought about the economic meltdown--made by bankers, government officials, and ordinary homeowners--were rational responses to a flawed global financial order in which the incentives to take on risk are incredibly out of step with the dangers those risks pose. He traces the deepening fault lines in a world overly dependent on the indebted American consumer to power global economic growth and stave off global downturns. He exposes a system where America's growing inequality and thin social safety net create tremendous political pressure to encourage easy credit and keep job creation robust, no matter what the consequences to the economy's long-term health; and where the U.S. financial sector, with its skewed incentives, is the critical but unstable link between an overstimulated America and an underconsuming world.

In Fault Lines, Rajan demonstrates how unequal access to education and health care in the United States puts us all in deeper financial peril, even as the economic choices of countries like Germany, Japan, and China place an undue burden on America to get its policies right. He outlines the hard choices we need to make to ensure a more stable world economy and restore lasting prosperity.

(retrieved from Amazon Thu, 12 Mar 2015 18:22:48 -0400)

Raghuram Rajan was one of the few economists who warned of the global financial crisis before it hit. Rajan shows how the individual choices that collectively brought about the economic meltdown--made by bankers, government officials, and ordinary homeowners--were rational responses to a flawed global financial order in which the incentives to take on risk are incredibly out of step with the dangers those risks pose. He traces the deepening fault lines in a world overly dependent on the indebted American consumer to power global economic growth and stave off global downturns. He exposes a system where America's growing inequality and thin social safety net create tremendous political pressure to encourage easy credit and keep job creation robust, no matter what the consequences to the economy's long-term health; and where the U.S. financial sector, with its skewed incentives, is the critical but unstable link between an overstimulated America and an underconsuming world.… (more)

(summary from another edition)

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