Podcast: The hidden fractures threatening our economy
Raghuram Rajan is an economist, a former central banker and he is credited with predicting the 2008 financial crisis. And some of the fault lines he saw fracturing the economy in 2008 remain to this day.
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You can read the full transcript below:
[00:00:10.170] - David Brett
Raghuram, how are you? Where do we find you today?
[00:00:13.350] - Raghauram Rajan
Well, I'm in Chicago at the University of Chicago campus.
[00:00:18.510] - David Brett
Chicago, what a beautiful city.
[00:00:20.890] - Raghauram Rajan
It is. Wonderful Lakefront. It's a little hot today, but we'll take that in Chicago.
[00:00:28.490] - David Brett
How long have you been in Chicago for?
[00:00:31.490] - Raghauram Rajan
It's been 33 years now. I came here in 1991.
[00:00:38.120] - David Brett
It was like home then.
[00:00:40.650] - Raghauram Rajan
It is home, yeah, in many ways. But of course, home It's typically where the family is, so it tends to move.
[00:00:50.320] - David Brett
Lovely. Now, as said in my intro, you are an economist. You've written quite a few books. Economists don't tend to get much or tend to get a bit of a rough time from people about not being able to predict the future. Now, one of the things you're well known for is predicting the financial crisis back in 2008. I'm assuming you didn't get much credit for predicting the worst financial crisis of most of our lifetimes.
[00:01:15.540] - Raghauram Rajan
Well, I don't know what you mean by credit. What you mean is, did people believe me when I said there is a possibility we go crashing? The answer is, yeah, some people said that's a possibility, but obviously, I wasn't saying it's going to happen tomorrow. I started talking about it in 2005. When it actually happened, I think the timing was certainly a little bit of a surprise to a lot of people. After the fact, of course, people look back and give you credit for saying that, because I said it in front of a whole conference of central bankers saying we were possibly headed there at a time when we were celebrating Alan Greenspan's term as as Federal Reserve Chairman. It was a good occasion to remind the world's regulators that things might go off track, and it turned out that, in fact they did.
[00:02:16.150] - David Brett
I presume when you said it, there were probably a lot of sceptics in that room, were there?
[00:02:21.300] - Raghauram Rajan
There were some. Here's the problem. Having become a central banker after I wrote the book, one of the One of the problems is that there's always somebody saying the world is going to end at any point in time. The question is, how much weight do you put on their forecast? Really, it's not so much the forecast as what are the underlying causes that they point to, and do you believe them? That, to some extent, is... As a regulator, as a supervisor, you can't put a probability of one on any outcome. You're going to put a range of probabilities and a range of outcomes, and then you're going to act accordingly. I think some people did believe it, but what do you do when you're in the midst of a credit bubble?
[00:03:15.750] - David Brett
Well, you wrote a book all about it called Fault Lines. I'm just wondering, back then, what were the fault lines you were seeing before that 2008 crisis?
[00:03:23.410] - Raghauram Rajan
Well, the book was attempting to say this was bigger than just malfeasance in the financial sector, and that made it more frightening. That in some ways, what was going on was deep underlying pressures within the Western capitalist system, growing inequality, for example, certainly in the US. Part of that was because of trade, part of that was because of technology. But the consequence was that if people didn't get good jobs, if the middle was getting hollowed out, the response was, Let's make make borrowing easier. Let's allow people to take money out of their homes. Let's get them into housing first and then let the house become an ATM. There were a lot of politicians who were celebrating what was going on, perhaps for good reason, because if you don't have a good job, at least your consumption is not falling because you're borrowing in a big way. Of course, eventually it becomes unsustainable because there are huge levels of borrowing. That was what the financial crisis represented. It was an attempt to say, This is not just about bad guys. This is about a system going off track. Pointing to a few bad guys and saying, These guys messed up, is nice for the system because then you can move on.
[00:04:49.700] - Raghauram Rajan
But it's terrible once you think of the underlying causes because you haven't fixed them.
[00:04:56.660] - David Brett
Sounds like you're saying that we were all culpable. It wasn't just one set of bad actors.
[00:05:03.330] - Raghauram Rajan
That's right. I was trying to say that it's more frightening than a few bad actors because you can put those few bad actors away or at least lament the fact that you can't do that given the judicial system. But if it's more than that, if it's the system itself pushing you in this direction, one of the big chapters in the book was Let Them Eat Credit, which was essentially a way of saying, throwing was the substitute for cake, and that's what put the cake on the table. In some sense, it was basically saying that we hadn't fixed the underlying problems, which is why the book was saying the crisis was a symptom, but the underlying problem still exists. Those hidden fractures showed up later in another book I wrote, which showed up in the FT Shortlist.
[00:06:11.560] - David Brett
It's funny you mentioned that. I just wanted to move on to how many of those fractures still exist in the world we're currently living and how many have been fixed?
[00:06:21.470] - Raghauram Rajan
Well, what I said in the book was that this underlying inequality would create political pressures, which would then result in finger-pointing. The easiest finger to point at is trade because it's the outsiders. The outsiders within society, the immigrants. I said, Look, one of the concerns is if we don't fix these problems, we're going to have more social conflict going forward. That was exactly what we have seen over the last a few years since the global financial crisis, the rise of populist movements on the left and on the right, basically blaming the old system, becoming protectionist, anti-globalisation is rife, but also pointing fingers at migrants and so on. Now, I think the underlying malaise is one of good jobs of growing inequality. Unless we fix that, we will adopt policies which should make us collectively poorer. I mean, think of what Brexit has done to the United Kingdom, but may be a substitute for some of the... For actually fixing things. It's easy to point fingers. It's easy to say we're stopping migration or we're raising barriers against unfair trade. Trade is always unfair in the minds of the politicians. But the effect is the world becomes poorer, and it's problematic at a time when the problems we have to deal with, especially climate change, require global cooperation.
[00:08:24.940] - David Brett
It sounds like some of those fault lines you've been describing have actually widened since the financial crisis.
[00:08:31.440] - Raghauram Rajan
They have, which is why I wrote a follow-on book called The Third Pillar after an interlude as a central banker. But the third pillar was really about why the surge of markets, the surge of government, both of them, we usually think they're substitutes, but they actually complement each other. But they come at the expense of the third pillar, which is the social aspect, the community. One of the problems why we are seeing far more social breakdown is because the community is suffering across the world, whether it is the US, whether it's France, and the anger in the banlieues and in the forgotten little towns outside Paris or in the UK, with the north being left out of economic progress while London and the surroundings benefit tremendously. So, in a sense, I was developing the idea that the global financial crisis was just a very important signal that things weren't right.
[00:09:43.570] - David Brett
Have you witnessed any new fault lines opening up?
[00:09:47.710] - Raghauram Rajan
Well, I think that as we become more protectionist, as we limit trade, even while climate change is... we've done precious little to deal with a problem. We may even see at this point a change in the US administration, which unravels whatever little has been done in the US. I think given all this, I think some of the underlying problems are going to get worse. What we need is much more of a sense that this is a collective action problem. I mean, think of where climate change is going to hit. It's going to hit the poorest countries in the world. But those are the countries which don't have much economic activity as it is. And so, what's going to happen, you're going to have many more thousands of immigrants trying to look for opportunities elsewhere. You can all build walls around industrial countries, and I'm sure some of that will happen, but humans will find ingenious ways to get around them. The underlying pressures, if you slow down trade, if you slow down action on the climate, will show up in migration, which is already a huge problem in a number of countries, partly because we've never really focused on doing migration properly as opposed to just putting up barriers.
[00:11:28.610] - Raghauram Rajan
There are opportunities I want to say the world is not as grim because there's always opportunities. For example, with the aging of populations, there does open up the scope for bringing more people in from outside, but it has been done in a more effective way than countries have done so far, pushing them to come in small boats or traverse dense jungles. Sensible migration is something we we can do if we could put our minds to it. But similarly, sensible climate mitigation, climate adaptation is something we have to do. Otherwise, it'll be forced on us. I think if we tackle these problems, there are a lot of answers, and some of those answers may solve other. For example, that worker in the oil fields, and you say, Well, what are they going to do? Well, They are capable people. They could retrain in putting up solar panels. That's a simplistic statement, but it's saying we need a lot more green energy, and that means a lot more green infrastructure. You can solve one problem but deal with another problem, which is, yeah, some parts of manufacturing may have to slow down to give way to other parts of manufacturing.
[00:12:56.090] - Raghauram Rajan
The worst thing to do is to say, Oh, no change is the best policy, and protect industries that deserve to actually morph, to transform themselves.
[00:13:08.420] - David Brett
You mentioned you were a central banker. I just wondered whether the central banks are doing the right thing at the moment. Is there much they can do, or is this down to politicians and policymakers to help the rest of us navigate these waters?
[00:13:24.630] - Raghauram Rajan
Well, I think central bankers should be relatively focused on doing two or three things which they haven't done hugely well. One is keep inflation under control. The second is preserve financial stability. Given the constraints of both of those objectives, try and maximize employment. It's three parts of the stool. But I think getting them to deal with climate change, no, that's not their remit. Once you move them beyond their remit, it becomes very hard for them to actually do what they are supposed to do well. But I certainly do think that they have to be aware of how much we need to do in terms of investment, for example, for climate change. One of their tasks will be to try and keep inflation low and stable so that interest rates can be low and stable, and that can facilitate the investment we need, for example, to deal with climate. I don't think they should take on more than they can actually handle. I don't think they should be saying, We're the only game in town. They should pay appropriate respect to the politicians and say their mandate is to build consensus on the way forward, for example, on climate action.
[00:14:48.620] - Raghauram Rajan
But we will support it in the ways that we can, and that, I think, would be adequate.
[00:14:56.920] - David Brett
You don't fancy another shot of being a central banker then?
[00:14:59.790] - Raghauram Rajan
I beg your pardon.
[00:15:01.070] - David Brett
You don't fancy another go at being a central banker then?
[00:15:03.690] - Raghauram Rajan
No, been there, done that.
[00:15:17.720] - David Brett
Excellent. Well, we're here today basically, so we've got a partnership with the FT and the FT business Book of the Year. And your Fault Lines book, when it around about 15, 16 years ago, you've been obviously a number of books since. And as you mentioned, rather than got shortlisted for the prize later on. I just wanted to ask you a few questions around the book. So what do you think made Fault Lines an award-winning book? Is there a secret sauce?
[00:15:42.710] - Raghauram Rajan
I wish I knew. I don't think so. I mean, obviously, it has to appeal to the committee which is making the choices. I do think they look... I was surprised at some of the other competitors it beat out. I think at least my sense at that time, I don't know if it continues, is they're looking for new ideas, for ways of thinking about important issues which obviously resonate widely amongst the public, but also are new and different. Very popular journalistic treatments are good, but they want something more. That's why sometimes the business Book of the Year Award goes to surprising books, even though there's a more popular seller out there.
[00:16:52.110] - David Brett
Did the award have any impact on your career or the book at all?
[00:16:57.110] - Raghauram Rajan
Well, I'm a card-carrying academic, so I do write books every once in a while. It was gratifying in the sense that it certainly did wonders for sales. That was good. I mean, Fault Lines was widely read and helped the narrative about the crisis. But did I change my life as a result? Probably not because I was already in the business of writing for a living.
[00:17:39.120] - David Brett
Are there any challenges or memorable moments when you were writing the book at all?
[00:17:43.750] - Raghauram Rajan
Yes. I mean, look, every book is as much an experience in learning as in writing. You read widely, you learn things you didn't know when you started the book, and hope that at the end of the writing, it all comes together. Now, Fault Lines was based on an event, and I had a sense of what I wanted to say. As a result, it came together a lot more easily. There are some other books. The follow on third pillar was a little more open-ended. What has become of capitalism with all the inequality rising from trade and technology. It's only after writing the second or the third draft that I realised what the book was about. Sometimes, they're all learning experiences services, but it's also a communication device, and it's important that at the end of it, you understand what you're trying to communicate.
[00:18:55.790] - David Brett
Just for any young and aspiring writers out there, is there one piece of advice you can give them when they're trying to write books like this?
[00:19:03.350] - Raghauram Rajan
The easiest advice is write. You can theorise all you want about the structure, et cetera. Of course, you want to think a little bit before writing, but do a rough sketch of what you want to write, and then write. Once you've got those 700 pages written, you will say, Well, it's a little long, it's a little unfocused. What's the clear message? Pruning down, of course, different strokes for different folks. Sometimes the best way to write a book is to write it. And get that first draft done, and then things get better.
[00:19:52.730] - David Brett
Sound advice. Raghuram Rajan, thank you so much for joining us. It's been an absolute pleasure.
[00:19:57.670] - Raghauram Rajan
Likewise..
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