FT Business Book of The Year....An Excellent Choice

The Financial Times recently awarded it's business book of the year and made this excellent choice; Fault Lines  Raghuram Rajan,   The book is not a comprehensive view of where we are at in the world economy, how we got here and some ideas on how to deal with the crisis. Rajan has the distinction of having addressed the Federal Reserve's 2005 Jackson Hole conference and, with Fed Chairman Greenspan in the audience, warned of the impending financial crisis.

Rajan's book has a perspective that might be particularly surprising given that he is on the faculty of the University of Chicago Business School. A primary part of his thesis is that  politicians and central bankers unwilling to deal with the root causes of greater income inequality used the short cut of cheap money and access to credit so that individiuals and the nation of the whole could borrow in order to create an (illusory) standard of living. With all the incentives in place to borrow, inadequate regulation and controls on leverage the stage was set for the crisis.  He finds plenty of blame to spread around and spares no group in his criticism. And here is a free market economist that argues that the road back to a stable economic system must include both stronger and better regulated free capital markets, increased means to narrow income gaps through better educational opportunities, universal access to healthcare, and an improved social safety net (and yes even progress on global warming).

On the international realm he probably too optimistically puts faith in a greater role for international economic institutions reflecting some frustration with his experience as chief economist of the IMF. He presents a nice overview of China's role in the international economy and the necessity for it to move past its policy of an articficially low currency value and export oriented growth into a more balanced policy with more emphasis on domestic economic growth.

As for where Rajan thinks we are at right now in the US economy, I doubt much has changed in his views from these he expressed in an interview with the  New Yorker's John Cassidy:

Where do we go from here?
The real problem is that the United States has, in many ways, been encouraging too much consumption as a palliative for other things that haven’t been solved. So we muddle along because the crisis wasn’t deep enough [to force big changes]. We used all our bullets. We don’t have any bullets left, and we are in the process of encouraging risk-taking all over again. I’m not saying we are necessarily going to have another crisis soon. But what do we have in reserve if we haven’t dealt with the fundamental problems? That’s my worry—that we will emerge without a serious sense that there are problems we need to fix. We will have identified bonuses as an issue, or something like that, and imposed some constraints. But we won’t have dealt with the underlying deep problems.

And clearly on the international side of things we are further not closer from any kind of international agreements on trade or exchange rates.