Monetary Policy and the Indian Economy with Raghuram Rajan (former Governor of Reserve Bank of India)

Jon Hartley and Raghuram Rajan discuss Raghu’s research, his policy career including his time as the Governor of the Reserve Bank of India and the Chief Economic Adviser to the Government of India under Prime Minister Manmohan Singh, India adopting inflation targeting during his tenure, Rajan predicting the 2008 financial crisis, and economic growth in India, the legacy of his book Saving Capitalism from the Capitalists among many other topics.

Recorded on February 19, 2025.

ABOUT THE SPEAKERS:

Raghuram Rajan is the Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth. He was the 23rd Governor of the Reserve Bank of India between September 2013 and September 2016. Between 2003 and 2006, Dr. Rajan was the Chief Economist and Director of Research at the International Monetary Fund.

Dr. Rajan’s research interests are in banking, corporate finance, and economic development. The books he has written include Breaking the Mold: Reimagining India's Economic Future with Rohit Lamba,  The Third Pillar: How the State and Markets hold the Community Behind 2019 which was a finalist for the Financial Times Business Book of the Year prize and Fault Lines: How Hidden Fractures Still Threaten the World Economy, for which he was awarded the Financial Times prize for Business Book of the Year in 2010.

Dr. Rajan is a member of the Group of Thirty. He was the President of the American Finance Association in 2011 and is a member of the American Academy of Arts and Sciences. In January 2003, the American Finance Association awarded Dr. Rajan the inaugural Fischer Black Prize for the best finance researcher under the age of 40. The other awards he has received include the Infosys Prize for the Economic Sciences in 2012, the Deutsche Bank Prize for Financial Economics in 2013, Euromoney Central Banker Governor of the Year 2014, and Banker Magazine (FT Group) Central Bank Governor of the Year 2016. Dr. Rajan is the Chairman of the Per Jacobsson Foundation, the senior economic advisor to BDT Capital, and a managing director at Andersen Tax.

Jon Hartley is a policy fellow, the host of the Capitalism and Freedom in the 21st Century Podcast at the Hoover Institution and an economics PhD Candidate at Stanford University, where he specializes in finance, labor economics, and macroeconomics. He is also currently an Affiliated Scholar at the Mercatus Center, a Senior Fellow at the Foundation for Research on Equal Opportunity (FREOPP), and a Senior Fellow at the Macdonald-Laurier Institute. Jon is also a member of the Canadian Group of Economists, and serves as chair of the Economic Club of Miami.

Jon has previously worked at Goldman Sachs Asset Management as well as in various policy roles at the World Bank, IMF, Committee on Capital Markets Regulation, US Congress Joint Economic Committee, the Federal Reserve Bank of New York, the Federal Reserve Bank of Chicago, and the Bank of Canada. 

Jon has also been a regular economics contributor for National Review Online, Forbes, and 
Today my guest is Raghuram Rajan, who'sa professor of finance at the University
of Chicago Booth School of Business.
He previously served as the 23rdgovernor of the Reserve bank of India,
is the chief economic advisor to thegovernment of India under Manmohan Singh,

(00:33):
and chief economist of the IMF.
Raghu is also a very acclaimed academic.
In 2003, he receivedthe inaugural Fisher Black Prize,
which is given every two years bythe American Finance Association
to the financial economist younger than40, who has made the most significant
contributions to the theory andpractice of finance.
And also in the 2000s, he famouslypredicted the global financial crisis.

(00:54):
Welcome, Raghu.

>> Raghuram Rajan (00:56):
Pleased to be here.

>> Jon Hartley (00:58):
I wanna first talk about your background.
You grew up in India.
How did you first getinterested in economics?
And what was your pathto doing a PhD at MIT?

>> Raghuram Rajan (01:06):
Well, I think when you're in a poor country.
My father was a diplomat, sowe had spent some time in Europe.
And when I came back to India,
the first thing that hit me washow little there was in the shops.
Milk was rationed, bread was rationed.

(01:28):
You had to essentially make friends withthe shop owner to get half a loaf of
bread.
And you wondered why this was the case.
Why was it that we were poor?
I mean, the people I met atschool weren't any less smart
than the people I had beenat school with in Belgium.
And so the desire to know more about that,

(01:51):
to do something about that,
was ingrained from that early age.
Of course, in the middle,I wanted to be a fighter pilot and all.
The other fun stuff thatyoung boys want to do.
But as I graduated from school,
I think what many Indiansdo is they sit for

(02:16):
a very competitive exam to enter the IITs.
And I'd studied a lot andsunk cost fallacy.
Once I'd studied, I thought I shouldtake a degree in engineering.
That seemed like a sure way to get a job.

(02:37):
And job security is quite important.
So I went to one of the IITs somewherein the middle of my third year.
I said, what the hell am I doinghere learning fields and waves.
I just can't connect to that.
And that sort of causeda slow movement away
from engineering to firstmanagement degree, and

(02:58):
then eventually the PhD,which was at Sloan.
So it was a management PhD,but in finance, and
I took a lot of classes inthe economics department.
So that's how I gravitatedtowards economics.

>> Jon Hartley (03:13):
Well, that's fascinating.
And I want to drill downinto some of your research.
You've done a lot of really seminal workon banking, a lot of it with Doug diamond,
who recently won the Nobel Prize.
What have been some of the biggestfindings from your research in banking and
what do you think has heldup best over the years?

>> Raghuram Rajan (03:33):
Well, I think that perhaps the most important finding
is the one that we'restill battling people on,
which is the notion that there'sa purpose behind the structure
whereby banks are financed withshort term debt and lend long.

(03:57):
This mismatch is not just because youwant to give people access to liquidity,
which is what Doug focusedon in his early work, but
also because it may well be a veryeffective form of governance.
Not somuch that the short term deposit holders

(04:18):
are sort of monitoring your every move and
they know more than the market orthey know more than the board.
By the way, bank boards are typicallyrelatively clueless about what's going
on in the bank apart fromwhat the CEOs tell them.
But it's really that it's a very effectivepunishment mechanism if the banks trace.

(04:43):
If you go off track andyou can't actually make payments,
you get closed down immediately.
That's the bank run.
And so it's an effectivepunishment mechanism which
doesn't really require anybody to monitor,
apart from just making sure theytest the bank periodically.

(05:05):
Somebody's testing it always,saying I want my money, and
if as soon as the bank can't deliver it,it gets closed down.
This to my mind explains the structureof banks for 5,000 years.
It's not that in Babylon bankshad interest tax deduction and
therefore they had the structure,or in Italy,

(05:29):
it's that it's a veryeffective punishment device.
Of course, augmented in Barcelona,if you defaulted on your debt,
you were put on a diet of bread and wateruntil you delivered to your creditors,
and if you didn't past a certain time,
you were executed,you had your head lopped off.

(05:50):
I think that added to the kindof punishment mechanism.
But I think if you lookat the free banking era,
you look at every era of banking.
Yes, the short term claimoffers liquidity services, but
it's also a punishment device.
And both are criticallyimportant to how a bank works.

>> Jon Hartley (06:11):
I know there's also the debtors prison era as well.
It's fascinating these differenttime periods and yet in banking,
I mean, the purpose of bankingserves maturity transformation.
And certainly, banking I think iscertainly undergo a massive rethinking
since the global financial crisis.
I wanna talk a little bit aboutthe global financial crisis.

(06:34):
Obviously there's been a lot ofdiscussion about regulation.
Since then, there's been Dodd-Frank,
Basel III capital requirements thathave been imposed throughout the world.
I mean, you famously predictedthe buildup in mortgage credit ahead of
the global financial crisis with 2005,now famous Jackson Hole speech,
which I think then in 2005was much maligned but

(06:56):
later vindicated after the globalfinancial crisis of 2008, 2009.
And what led you to that insight in 2005?
And I know a lot of this isencapsulated in your book Fault Lines,
but what led you to think about thatmaybe that there's excessive mortgage

(07:16):
credit in the system and that that couldpotentially be a systemic concern?

>> Raghuram Rajan (07:22):
Well, to some extent it was academic perversity.
I was the chief economist ofthe IMF at that point and
I was asked to speak on this occasion.
And it was Alan Greenspan's lasthurrah as chairman of the Fed, and
he had given some memorablespeeches at Jackson Hole.
Everybody was waiting tohear his last speech.

(07:46):
But also there were a parade ofpeople sort of saying he was
such a great central banker.
And there was some debate as towhether he was the best US central
banker in history or just a second best.
And you know, in this I, I sort ofthought initially of writing a piece and

(08:06):
how, how all the developments thathad happened during his time,
including liberalization, et cetera.
But then as I started looking at the data,I said, well, wait a minute, there's
all this risk in the system and there'sa real question of where it's gone.
Because suddenly the system doesn't seemto be that bothered about risk anymore.

(08:30):
Where really has it gone ifthe banks aren't taking risk?
Who is taking risk?
And how are the banks making moneyif they're not taking any risk?
The conclusion I came to after thinkingabout it a bit was really that the banks
were taking tail risk and getting paid forit without the risk showing up.

(08:56):
What that meant was just like insurancecompanies, you get a premium but you know,
they're taking risk and they know theyhave to pay out, right at some point.
Well, the banks were taking the risk,getting the premier looking really
profitable, but when the day came topay out, they might look really bad.

(09:16):
That was the underlying sortof idea behind that talk.
And then I documented the variousways they were taking this tail risk.
And then the question was, which wasthe real important question at that time?
Why are the smartest guyson the planet doing this?
And the pushback I got was precisely that,these are the smartest guys on the planet.

(09:40):
They figured it out.
They probably hedging it appropriately andyou know,
you're surmising thatthe risk is with them.
They've laid it off,it turned out they hadn't.
It turned out, I mean,just as I conjectured that they were all
taking these tail risks on their balancesheet and when push came to shove,

(10:03):
they could not get rid of the stuff andit took the biggest amongst them down.
One clear example I gave in thattalk was credit default swaps,
which are as close toinsurance when you write them,
you're insuring bonds andloans against default and

(10:24):
saying pay me a premium and I will comein to pay it off if the bonds default.
AIG had written a ton of these and
AIG was thought of as a reallyspectacularly good credit risk.
And then suddenly,it blew up during the global financial
crisis because it hadtaken these tail risks.

(10:47):
So, I guess I was lucky because what I
had conjectured actually worked out.
I was obviously not happythat it happened, but
I was relieved that I didn't have my,you know, hang,
I didn't have to hang my head in,in shame for the rest of my.

(11:09):
I remember Leaving home at that point togo to the conference and telling my wife,
this will either make me or break me.
Because I was the chiefeconomist of the imf.
So people did pay a littlebit of attention.
But of course,since what I said wasn't very popular,
there's very little reportingof it in the press.

(11:31):
After I gave that talk,despite, as I said,
the position that I held,it was not popular.
And then things happen.

>> Jon Hartley (11:44):
I think Larry Summers had, I think, famously made some comments,
I think maybe calling you a Luddite orsomething like that.
It's amazing to think how muchhas transpired since then and
in the aftermath ofthe global financial crisis.
I want to talk a little bit moreabout your amazing career in policy.

(12:05):
You had this first big policy jobas a chief economist of the IMF.
I'm curious, what did that teach you and
how did it come aboutexactly in the early 2000s?

>> Raghuram Rajan (12:15):
Well, I was a financial economist, as you've noted,
and it turns out thatthe IMF was looking for
a financial economist at that time.
After the East Asian crisis,they recognized that there are a lot
of macro economists andpeople who knew the real sector side, but

(12:38):
very few who were familiarwith the financial sector and
I had been friendly with Anne Krieger,
who was the first deputymanaging director at that point.
She called me up and said, would youlike to try out for chief economist?
Our current chief economist,Ken Rogoff, is leaving.

(13:01):
And I was really surprised because Ididn't think I belonged in the imf.
I was not a macroeconomist, and I thought,if anything, I would be a better fit for
the World bank as a financial developmenteconomist rather than a macroeconomist.
So I told Ann, let me confess,I don't know any macroeconomics.

(13:23):
And she said, well, that makes two of us.
And that sort of sealed it, if she could,she's obviously a great trade
economist and knows everything thereis to know about macroeconomics.
But it sort of gave me the sense thatshe would be supportive, as I learned.

(13:44):
And, you know,I had done the regulation courses,
I mean, the required courses at mit.
I had done a macro classwith Olivier Blanchard,
one of the great teachers there butthis, I said, fine.

(14:06):
And it turns out that macro, at leastas is practiced in policy circles,
is not that difficult to pick up.
As a colleague of mine said,the only thing you have to know
is which variable to pickas the exogenous variable.
Everything is endogenous.
So different people have foreverdebates on what's Exogenous.

(14:31):
As you know, we have a debate right nowas to whether the US Trade deficit is
driven by everybody in the worldwanting US Financial assets and
therefore forcing the USto run a trade deficit or.
Or the US Running a largefiscal deficit and
therefore overspendingrelative to the savings.
This debate will go on foreverbecause it's everything's

(14:55):
endogenous in macroeconomics.

>> Jon Hartley (14:57):
Yeah, everything is endogenous, that's absolutely right.
Yeah.
It's fascinating that you say that,I think, yeah,
macro is definitely a very theoreticaldiscipline within the academy.
But I think it's interesting, once yousort of get into the policy world, it ends
up being a lot of empirical macro thingsthat I think are perhaps of most interest.

(15:22):
And I'd say that's probably true withrespect to macro on Wall Street and
finance as well, to some degree.
I want to talk just a little bit aboutyour time as a policymaker in India.
You served as chief economic adviser tothe government of India under Mohan Singh,
Singh just recently passed.
What do you think the Singheconomic policy legacy is?

>> Raghuram Rajan (15:45):
I think it's actually a very important
one in the sense that he camein when India was in crisis.
Had gone to the IMF.
And he decided, I mean, he was the old

(16:07):
traditional sort of Indian economist.
He'd been to Cambridge but had studiedwith people like John Robinson.
I think he was more of the oldinterventionist school,
but he knew what the alternatives were.

(16:28):
And he had spent a lot of timein India in various policy,
wearing various policy hats andhe knew the system wasn't working.
So in a sense he was an insiderwilling to bring outside thoughts and
he really went about liberalization.
He had a very supportive Prime Minister,Narasimha Rao, but

(16:51):
as Finance Minister hereally created a revolution.
And you know, he was one of the,
it's not clear that there were thatmany establishment economists in
India at that point willing totake the risk and be out there.
And he did.

(17:12):
We forget now,we sort of think this was easy, but
it required a, a tremendous,tremendous courage and
a willingness to, you know,to embrace the unknown.
He did it, it worked.
And now of course, everybody sortof thinks it was a piece of cake.

(17:35):
It wasn't.
And you know, he was a very mildmannered man, very mild mannered.
You'd walk into a room andeverybody would be speaking, but
the Prime Minister,when he was Prime Minister would not.
He listened, andthen you realize he's actually

(18:00):
been paying attention andhe knows what's what.

>> Jon Hartley (18:05):
It's amazing.
And for our listeners that aren't reallyfamiliar with Manmohan Singh and his
legacy, I mean, he serves Finance Ministerin the early 90s in the Rao government.
And was really the central advocate forwhat's now referred to as the Rao reforms.
And this is a period ofeconomic liberalization that
was followed by a massive surgein economic growth in India.

(18:30):
And it's a fascinating story in of itself.
And we'll talk a little bit moreabout growth in India in a minute.
But you also want to just talkabout inflation for just a moment.
I mean, in monetary policy,
you were the 23rd governor ofthe Reserve bank of India.
I mean, what is the history ofinflation and central banking in India?

(18:52):
And how did your tenure change that?

>> Raghuram Rajan (18:55):
So I, again, this is Dr.
Manmohan Singh's foresight.
He was very good at bringingpeople in from the outside.
And he had brought a number ofeconomists from the World Bank,
from various Washington organizationsback to India to help with reforms.

(19:20):
One of which was his strong ally, Dr.Montec Singh Alawalia.
But what Dr.Manmohan Singh asked me to do was to
write a plan for financial sector reforms.
This was after I had servedas IMF chief economist,

(19:42):
and it was sort ofa fascinating sort of task.
What all would we changeif we had a free hand?
And I wrote that report,gave it to him and it sat on a shelf.
But he then invited me tobe chief economic advisor.

(20:03):
That was in a sense a trial to seethat I wasn't nuts in some way.
And then I was brought in asgovernor of the Reserve Bank.
India was going through the taper tantrumat that time, so a lot of turmoil.
The currency had plummeted 25% andbecause we were subsidizing

(20:26):
the price of oil andoil prices were denominated in dollars,
that meant the fiscal deficitblew out very quickly.
So everything bad was happening.
Inflation was double digits, the currencywas going through the floor and
the fiscal deficit was not good anddidn't look good.

(20:46):
And I came in andmy thought was we need to chalk out
an agenda which builds someconfidence in markets.
So on the first day after I took over,I gave a speech to TV which
basically said here are the stepswe're going to take.

(21:09):
Many of them from that report I had done,
which included liberalizingbank branching, etc., etc.
But also importantly saying we're gonnamove towards inflation targeting.
I've asked the deputy governor to chalkout the steps we need to do to move
towards that.
A whole bunch of steps in terms ofreforms were announced on that first day.

(21:33):
I think that helped build some confidencethat we were back on a reform path.
And over time the exchange rate cameback to something like normalcy.
But importantly, and this is whatmy Latin American Central bank
governor friends had told me,forget about the exchange rate,

(21:56):
worry about inflation andsay you're worried about inflation and
that's going to be key tostabilizing everything.
And that's what we said.
We said we're on an inflation glide path.
We are going down to this levelin the space of two years.
Here are the intermediate targets.

(22:17):
Once we get there, we'll move intofull fledged inflation targeting.
I don't know how it worked, but it worked.
By the time I left,we were in the middle of the band,
which was 2 to 6%, which is around 4.
We'd started at double digits.

(22:38):
And we had signed the pact withthe government for inflation targeting..
And the committee was metjust after I left for
the first time, so that was some success.
And it stayed largely withinthe band over the last few years,
including in difficult times like the postCovid inflation around the world.

(23:02):
And right now it's again trendingtowards the midpoint of 4.
So I think it's been very.
People have done studies on it,it's been very successful in
bringing inflation down toapproximately where it should be.
What was important is that we establishedcredibility by not being overly ambitious.

(23:24):
So we had this glide pathto get into the band, and
I didn't want to announce inflationtargeting until we were in the ban and
were confident we could remain there.
And that was what was importantto establish credibility.
If we had announced inflation targetingand found we had no way of being
in the band, then we'd havediminished credibility totally.

(23:47):
So it was a process, butI think it'll serve India well.

>> Jon Hartley (23:52):
It's fascinating,
bringing inflation targeting intoIndia is a huge accomplishment.
And interesting that at some level,
how you needed to have a sort ofa glide path and that it needed to be
something of a gentle evolutionrather than a swift revolution.
And that is interesting to think about,I guess these sorts of, you know,

(24:16):
political economy sort of constraints evenwhen we sort of may have the right idea of
what the optimal policy thing to do mightbe from an economic policy standpoint.
I want to talk justa little bit about growth.
India is still a poor country,GDP per capita in India today is around

(24:37):
$2500 U.S,this is about 5x of what it was in 2000,
about eight times what it was in1991 when the RAO reforms began.
What do you think about say the Modi BJPgovernment's attempts to further say,
a pro business agendathat perhaps began with
the Congress rousingreforms in the early 1990s.

(25:01):
What do you think right now needsto be top of mind as it relates to
pro growth India economic policy?

>> Raghuram Rajan (25:09):
I think what we need to do is try and figure out what makes
sense in an environmentwhere automation is making
it very difficult to createa lot of manufacturing jobs,
where there is potentialimpending automation also in

(25:30):
services through AI and so on,which is coming down the line.
Where most of the big marketsare turning protectionist
in some way, especially formanufactured goods.
Everybody has some sort ofmanufacturing fetishism,

(25:51):
sort of embedded we need to producestuff because all the other
things that we do are sort of ephemeral,not real production.
You know, it's the old, what was it,the scholastic view that's come back.

>> Jon Hartley (26:09):
Or something, the mercantilist view or, I don't know.

>> Raghuram Rajan (26:11):
Well, mercantilist on the protectionist side, but
on the notion that the onlyreal sort of activities or
venerable activities are making things or
growing things, agriculture andmanufacturing and
everything else is a scam,especially finance.

(26:33):
Trading also is a semi scam, butfinance is the biggest scam of all.
Those used to be notions way back butI think that in
an environment where it'sgetting more protectionist and
of course in an environmentwhere China is still
finds it very hard to getaway from manufacturing and

(26:57):
has a huge presence therein that environment,
where is the space for India to grow?
And what I have been arguingis trying the old export led
manufacturing growth path is goingto be much more difficult and
it's not going to create the kindsof jobs that India needs and

(27:21):
we need a different growth path.
And what I've been advocating in myrecent book Breaking the Mold is
a focus on service, high Skilledservices for the export sector,
generating the kinds of foreignexchange revenues you need,
but also moderate skilled servicesfocused at the domestic market,

(27:46):
which India has a big, big one.
In order to create more jobs,obviously you take what manufacturing
you can get and you do whatevervalue added agriculture you can get.
Agriculture still accounts fora significant portion of Indian jobs,
but for the modern sector it may haveto be more of an emphasis on services,

(28:11):
both high skilled and moderately skilled,rather than on manufacturing.
And it's not just a problem for India.
You see, Indonesia also strugglingto create middle class jobs.
You see, China now strugglingto create jobs for youth.
That manufacturing led growthpath is showing its age

(28:35):
in a world where somany other things have changed.
And I think we need a growth path forthis new world.
And that's what I've been trying to push.
The government is entirely focusedon building a manufacturing sector
in India and they also suffer a littlefrom manufacturing fetishism.

(28:56):
If we're not manufacturing anything,what are we really doing?
And so they're plying the sectorwith subsidies and so on.
But I worry that this isnot effective job creation.
And if you look at the numbersover the last 10 years, in fact,
look at the last five years, writing offthe first five years as a learning phase.

(29:21):
In the last five years,
manufacturing has actually created fewerjobs than its share of the economy.
Services also hasn't done that well,
because what really haspicked up is agriculture,
which is extremely worrisome ina country which is developing.
The Arthur Lewis kind of model would say,

(29:44):
you first drain the agriculturalsector of workers.
And in many modern economies it's 5%.
In India, it's still a significant number.
53% of jobs in the last fiveyears were in agriculture.
And that's not.

>> Jon Hartley (30:04):
There's been that big of a pickup in agriculture.

>> Raghuram Rajan (30:06):
Not so much a pickup in agriculture as a lack of jobs
in the other sectors.
So people stay at homein their villages or
have gone back to their villages into,you know, overcrowded farms.
It's not that the farm sizes are thatbig to afford everyone a livelihood.

(30:27):
And so it's actually a sign thatwe're not producing enough good jobs.

>> Jon Hartley (30:34):
Interesting.
That's fascinating.
And for our viewers here, definitelyrecommend checking out Rajan's book,
Breaking the More India's Untraveled Pathto Prosperity.
It's fascinating just to think abouteconomic growth in India and elsewhere and
all these market reforms that transpiredover the late 20th century and

(30:57):
there's a paper by Andre Schleiferthat sort of describes this period as
the age of Milton Friedman.
And it's interesting to think aboutthe legacy of many of these market reforms
now, many years later, andsome of the effects of of these things.
It's a research interest of minethat I think is very interesting and
some of these microforms, obviously, aresomewhat more controversial than others.

(31:21):
But it's something that Ithink began in the 70s and
80s and really touched many,many countries.
And now we're in a world where growthlooks very different than it once was.
But there's still even though therehas been a considerable amount of
convergence in maybe the past,

(31:43):
in the couple decades leading up to Covid,I think it's not totally clear
that we're still on a path to convergencein the post Covid years here.
I want to talk just a little bitabout an old book, actually,
that you wrote a book in 2003.
Titled Saving Capitalism from theCapitalists you wrote with Luigi Zingales.

(32:04):
I'm curious, 20 years later,how do you think it's held up?
And you've written quite a bit recentlyon this topic of riskless capitalism.
I'm curious what you mean by that.

>> Raghuram Rajan (32:15):
So we wrote that book worried about cronyism and
saying that both George Stigler and
Karl Marx were worriedabout the same thing,
business being in bed with the government.

(32:37):
And if there was a problemwith capitalism,
it was primarily that workingto both stifle competition but
also promoting authoritarianism.
When they were in bed together, of coursethey had very different solutions.
Stigler's solution can be caricaturedas get rid of the government.

(32:59):
And Karl Marx was get rid of the businessand let government run everything.
They're caricatures, butI think that the problem still remains.
And we're seeing it in the United Statestoday, that big business being very,

(33:19):
very closely in bed with government on somany dimensions.
We're also seeing the revivalof industrial policy
where government decides it has allthe foresight needed to pick winners.
And you know, coming from a country,

(33:41):
Luigi coming from Italy,I coming from India,
where we saw the dangersof these kinds of policies,
we were trying to argue inthat book that that one,
it was very problematicwhen that happened.
And second, that the only surefireway of creating a pro-competitive

(34:06):
environment was openness,including trade openness.
It was competition from the peopleyou don't control that keeps
cronyism under check because you know solong as you're open or
forced to be open, your people have tocompete with the rest of the world.

(34:28):
Of course we were aware, butwe didn't anticipate the extent
to which there would be a movement toclosing down the borders and to protect.
Given how we had seen how badthat could be in our economies,
we thought the US would notmove in that direction.

(34:54):
We certainly there have been other forces
which have moved us in that direction.
I think primarily the force of technology.
Technological change,as always, has been huge.
And people blame the loss ofmiddle-income jobs to globalization.

(35:15):
But as you know, most economists wouldsay the bigger factor is technological
change and that's killed a lot of middleincome jobs, creating the reaction.
And that reaction to some extent hasbeen deflected towards globalization.
I think globalization bearsonly part of the blame.

(35:36):
And what we've done as a result iscreated the environment where everything
closes down.
And that I think will serve us very,very poorly.

>> Jon Hartley (35:47):
When you write about riskless capitalism, I'm curious,
what do you think about bailouts?
And not just bailouts per se, butI think thinking back to 2008 and
sort of the pre 2008 era versus the post,
I think there is a greater reflexivity onthe part of policymakers to intervene,
whether it's more quantitative easing orwhether it's some sort of like,

(36:13):
you know, say,dovish monetary policy signal,
if there's some sort ofdisruption in financial markets.

>> Raghuram Rajan (36:21):
Yeah, I mean- >> Jon Hartley
the Powell put, you name it, or evenwhen you think the 2020, 2021 response.
It seems to me like it's tryingto not only put out all fires,
but prevent any fires frompossibly ever coming up again.

(36:43):
And I don't know if that's something thatI think sort of at some level there has
to be some fires,there has to be some risk taking.
That's just part of the nature ofcapitalism, part of the economy.
I'm curious, do you think thereis a moral hazard risk there?
So there are two kinds of riskless capitalism, right?
One is where you takeout the capital upfront,

(37:04):
which is practiced by a number ofentrepreneurs across the world,
and you run the enterprise onsomebody else's money, right?
A second related,you run it on a very thin layer of equity.
But you also depend a loton public intervention to

(37:26):
bail you out when things go wrong.
I think that the west suffers more from
the latter right now that risk taking.
And I would say, when I say the West,
I think Europe is much more concernedabout the downside risks and

(37:50):
tends to regulate in such a way thatyou really also eliminate the upside.
But it's perfectly willingto intervene when,
despite all the regulation,bad things still happen.
I think in the US there'smore of a tolerance for
downside risk in the hope thatit will create some upside.

(38:11):
So for example, the willingnessto let crypto currencies run
wild without regulating them,hoping that maybe there's some
technological development therewhich makes us all better off.
But I think the flip side ofthis is that the US has become
much more willing tointervene in order to protect

(38:36):
the broader mass of peopleagainst the downside.
And some of this may have to do withalso the fractures in society that
we see that people are angry as it is andyou don't want them to get much angrier.
So we saw the repeated sortof transfers to households,

(38:58):
but also to small firmsduring the pandemic.
And some of those transfers to smallfirms went straight back to their banks.
And so the banks which shouldhave taken a hit because of,
you know, bad stuff happens occasionally.
Actually saw their loan lossesgo down during the pandemic.

(39:19):
And we also saw 2023,March 2023, perhaps the most
expensive bank crisis in terms ofassets that failed over 900 billion.
But also hugely important inthe extent of intervention.
Effectively, the Fed and
the treasury combined to say alluninsured deposits are now insured.

(39:44):
And when that happens,as you correctly put does suggest to
people who signed up toa contract that they would take
the risk of putting theirmoney in an uninsured way,
that if they did it in sufficient mass,they would all be bailed out.

(40:05):
I don't think we've seenthe last consequence of all this.
The one immediate consequence wasthe public thought it wasn't a big deal.
Nobody is paying attentionto the big crisis of 2023.
They call it a mini crisis because ofthe massive intervention that took place.
Now what that means is that a bunch ofplayers in the market know that when

(40:30):
liquidity gets tight, the Fed willcome in with all guns blazing and
may alter contracts also ina way as to protect the system.
Will Lehman ever happen again?
Not if the Fed can help it.
Because the lesson from Lehmanis never again and not so much.

(40:51):
Okay, we need the regulations to makesure that Lehman doesn't really happen.
I'm not saying we need a wholelot of new regulations.
I'm saying that we need to make surethat we are regulating reasonably
given the kinds of interventionsthat the system has come to expect.

(41:16):
Otherwise, this is a one-way street,heads I win, tails the public loses.
And that is another version of risklesscapitalism that I think we've engendered.
Especially forthe people taking big bets in the system.
Big financial bets in the system.

>> Jon Hartley (41:34):
Absolutely, yeah, 2023, I think we still don't
fully understand what the consequencesof it really are in terms of if
de facto all deposits are reallyactually insured versus not.
There's still, I think, quite a bitto be figured out in terms of what

(41:57):
deposit insurance is andwhat its limits are in the US.
Very fascinating hearing about yourthinking around riskless capitalism.
And a real honor to have you on Raghu andhear about your career and ideas.
Thank you so much for joining us.

>> Raghuram Rajan (42:11):
Thank you, Jon, it's a pleasure being with you.

>> Jon Hartley (42:14):
This is the Capitalism and Freedom in the Twenty-First Century
podcast, an official podcast ofthe Hoover Economic Policy Working Group,
where we talk about economics,markets, and public policy.
I'm Jon Hartley, your host,thanks so much for joining us.
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