Tuesday, April 27, 2010

Rajan on sources of crisis

Chicago Booth finance prof Raghuram Rajan discusses his new book "Fault Lines" with WSJ columnist David Wessel. Rajan gained fame in 2005 when he rained on a career celebration of Alan Greenspan by saying big banks were leading the global economy into big trouble. "I felt like an early Christian who had wandered into a convention of half-starved lions."

Rajan sees three fault lines, all of which continue to pose serious threats to our economy: (1) the expansion of cheap credit in the US in the previous decade; (2) excess savings overseas in countries such as China that helped fuel low interest rates; and (3) continued expectations in the financial arena that the US government will bail them out in the case of another crisis. All of which makes the current debate over financial regulation all the more critical.

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