FAULT LINES- How Hidden Fractures Still Threaten the World Economy.

FAULT LINES

The title of the Raghuram Rajan’s new book Fault lines refers to the hidden and extremely destructive fissures present in our world’s economic system that was the primary cause of the financial collapse of 2007 and the Great Recession. Theses culprits are none other than greedy bankers, sleepy regulators and irresponsible borrowers whose individual choices that collectively brought about the economic meltdown.

Raghuram Rajan was one of the few economists who warned the world of the global financial crisis before it even hit. In the book Rajan warns us of the serious flaws in the economy that need to be fixed to prevent potentially more devastating crisis that awaits us. According to Rajan there were two main causes that led to initial breakdown-One was stagnant wages and the other was growing inequality in the U.S. All this led to the reduced purchasing power of many middle class households which gave birth to an urgent demand for credit. The financial industry that had already gained encouragement from the government responded back by supplying home equity loans, subprime mortgages and auto loans. Most economists had failed to consider that the side effects of this unrestrained credit growth would turn out to be more devastating.

Raghuram writings are always well reasoned and based on sound set of facts. While the book is worth it even for the explanation of why we had a crisis and is even the most thought provoking contribution in the aftermath of the financial crisis. Readers will find that the book is full of great examples and cases and will certainly question some long held biases about current economic conditions in western countries. Raghuram in his book also lays out some common patterns of global economic behavior in households , markets and governments and shows that when economic conditions become so demanding the difference of behavior between developed and developing countries becomes negligible.