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. He also wrote a book about it called Fault Lines: How Hidden Fractures Still Threaten the World Economy. The book won the FT Business Book of the Year award in 2010.

And those fault lines that Rajan wrote about 15 years ago, some of them are still coursing through our economy and markets.

On this show, we discuss what those fault lines were, which ones still exist and if new fault lines have opened up.

The shortlist for the 2024 edition of the FT and Schroders Business Book of the Year has already been announced. The winner will be revealed on December 9. To find out more visit ft.com/bookaward.

RUNNING ORDER:

01:20 - Part one: predicting a financial crisis

07:12 - Part two: the fault lines threatening our economy

14:17 - Part three:  what can policymakers do?

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Episode Transcript

(00:10):
Raghuram, how are you?
Where do we find you today?
Well, I'm in Chicago at theUniversity of Chicago campus.
Chicago, what a beautiful city.
It is.
Wonderful Lakefront.
It's a little hot today, butwe'll take that in Chicago.
How long have you been in Chicago for?

(00:31):
It's been 33 years now.
I came here in 1991.
It was like home then.
It is home, yeah, in many ways.
But of course, home It's typically wherethe family is, so it tends to move.
Lovely.
Now, as said in my intro,you are an economist.

(00:55):
You've written quite a few books.
Economists don't tend to get much or tendto get a bit of a rough time from people
about not being ableto predict the future.
Now, one of the things you're well knownfor is predicting the
financial crisis back in 2008.
I'm assuming you didn't get much creditfor predicting the worst financial
crisis of most of our lifetimes.

(01:15):
Well, I don't know whatyou mean by credit.
What you mean is, did people believe mewhen I said there is a
possibility we go crashing?
The answer is, yeah, some people saidthat's a possibility, but obviously, I
wasn't saying it's goingto happen tomorrow.
I started talking about it in 2005.

(01:39):
When it actually happened, I think thetiming was certainly a little bit
of a surprise to a lot of people.
After the fact, of course, people lookback and give you credit for
saying that, because I said it in front ofa whole conference of central bankers
saying we were possibly headed there at atime when we were celebrating

(02:03):
Alan Greenspan's term as asFederal Reserve Chairman.
It was a good occasion to remind theworld's regulators that things might go
off track, and it turnedout that, in fact they did.
Ipresume when you said it, there were
probably a lot of scepticsin that room, were there?
There were some.
Here's the problem.

(02:24):
Having become a central banker after Iwrote the book,
one of the One of the problems is thatthere's always somebody saying the world
is going to end at any point in time.
The question is, how much weightdo you put on their forecast?
Really, it's not so much the forecastas what are the underlying causes that

(02:46):
they point to, and do you believe them?
That, to some extent, is...
As a regulator, as a supervisor, you can'tput a probability of one on any outcome.
You're going to put a range ofprobabilities and a range of outcomes,
and then you're going to act accordingly.

(03:06):
I think some people did believe it, butwhat do you do when you're in
the midst of a credit bubble?
Well, you wrote a book allabout it called Fault Lines.
I'm just wondering, back then, what werethe fault lines you were
seeing before that 2008 crisis?
Well, the book was attempting to say thiswas bigger than just malfeasance in the

(03:29):
financial sector, and thatmade it more frightening.
That in some ways, what was going on wasdeep underlying pressures within the
Western capitalist system, growinginequality, for example,
certainly in the US.
Part of that was because of trade,part of that was because of technology.

(03:50):
But the consequence was that if peopledidn't get good jobs, if the middle was
getting hollowed out, the responsewas, Let's make make borrowing easier.
Let's allow people to takemoney out of their homes.
Let's get them into housing firstand then let the house become an ATM.

(04:12):
There were a lot of politicians who werecelebrating what was going on, perhaps for
good reason, because if you don't have agood job, at least your consumption is not
falling because you'reborrowing in a big way.
Of course, eventually it becomesunsustainable because there
are huge levels of borrowing.
That was what the financialcrisis represented.

(04:34):
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.
But it's terrible once you think of theunderlying causes because
you haven't fixed them.

(04:56):
Sounds like you're sayingthat we were all culpable.
It wasn't just one set of bad actors.
That's right.
I was trying to say that it's morefrightening than a few bad actors because
you can put those few bad actors away orat least lament the fact that you can't
do that given the judicial system.
But if it's more than that, if it's thesystem itself

(05:20):
pushing you in this direction, one of thebig chapters in the book was Let Them Eat
Credit, which was essentially a way ofsaying, throwing was the substitute
for cake, and that's whatput the cake on the table.
In some sense, it was basically sayingthat we hadn't fixed the underlying

(05:43):
problems, which is why the book was sayingthe crisis was a symptom,
but the underlying problem still exists.
Those hidden fractures showed up later inanother book I wrote, which
showed up in the FT Shortlist.

(06:11):
It's funny you mentioned that.
I just wanted to move on to how many ofthose fractures still exist in the world
we're currently living andhow many have been fixed?
Well, what I said in the book was thatthis underlying inequality
would create political pressures, whichwould then result in finger-pointing.

(06:35):
The easiest finger to point at is tradebecause it's the outsiders.
The outsiders withinsociety, the immigrants.
I said, Look, one of the concerns is if wedon't fix these problems, we're going to
have more social conflict going forward.

(06:56):
That was exactly what we have seen overthe last a few years since the global
financial crisis, the rise of populistmovements on the left and on the right,
basically blaming the old system, becomingprotectionist, anti-globalisation is rife,
but also pointing fingersat migrants and so on.

(07:21):
Now, I think the underlying malaiseis one of good jobs of growing inequality.
Unless we fix that, we will adopt policieswhich should make us collectively poorer.
I mean, think of what Brexit has done tothe United Kingdom, but may be

(07:45):
a substitute for some of the...
For actually fixing things.
It's easy to point fingers.
It's easy to say we're stopping migrationor we're raising barriers
against unfair trade.
Trade is always unfairin the minds of the politicians.

(08:09):
But the effect is the world becomespoorer, and it's problematic
at a time when the problems we have todeal with, especially climate
change, require global cooperation.
It sounds like some of those fault linesyou've been describing have actually
widened since the financial crisis.

(08:31):
They have, which is why I wrote afollow-on book called The Third Pillar
after an interlude as a central banker.
But the third pillar was really aboutwhy the surge of markets, the surge of
government, both of them, we usually thinkthey're substitutes, but they
actually complement each other.

(08:51):
But they come at the expense of the thirdpillar, which is the social
aspect, the community.
One of the problems why we are seeingfar 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 theforgotten little towns outside Paris or in

(09:17):
the UK, with the north being left out ofeconomic progress while London and
the surroundings benefit tremendously.
So, in a sense, I was developing the ideathat the global financial crisis was just
a very important signalthat things weren't right.

(09:43):
Have you witnessed any newfault lines opening up?
Well, I think that as we become moreprotectionist, as we limit trade,
even while climate change is...
we've done precious littleto deal with a problem.

(10:06):
We may even see at this point a change inthe 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 thatthis is a collective action problem.

(10:34):
I mean, think of where climatechange is going to hit.
It's going to hit the poorestcountries in the world.
But those are the countries which don'thave much economic activity as it is.
And so, what's going to happen, you'regoing to have
many more thousands of immigrants tryingto look for opportunities elsewhere.
You can all build walls around industrialcountries, and I'm sure some of that will

(10:59):
happen, but humans will findingenious ways to get around them.
The underlying pressures, if you slow downtrade, if you slow down action on the
climate, will show up in migration, whichis already a huge problem in a number of
countries, partly because we've neverreally focused on doing migration properly

(11:24):
as opposed to just putting up barriers.
There are opportunities I want to say theworld is not as grim because
there's always opportunities.
For example, with the aging ofpopulations,
there does open up the scope for bringingmore people in from outside,

(11:47):
but it has been done in a more effectiveway than countries have done so far,
pushing them to come in smallboats or traverse dense jungles.
Sensible migration is something we wecan do if we could put our minds to it.
But similarly, sensible climatemitigation, climate adaptation

(12:07):
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 oilfields, and you say, Well,
what are they going to do?

(12:28):
Well, They are capable people.
They could retrain inputting up solar panels.
That's a simplistic statement, but it'ssaying we need a lot more green energy,
and that means a lot moregreen infrastructure.
You can solve one problembut deal with another problem, which is,

(12:49):
yeah, some parts of manufacturing may haveto slow down to give way to
other parts of manufacturing.
The worst thing to do is to say, Oh, nochange is the best policy,
and protect industries that deserve toactually morph, to transform themselves.
You mentioned you were a central banker.

(13:11):
I just wondered whether the central banksare doing the right thing at the moment.
Is there much they can do, or is this downto politicians and policymakers to help
the rest of us navigate these waters?
Well, I think central bankers should berelatively focused on doing two or three
things which they haven't donehugely well.

(13:34):
One is keep inflation under control.
The second is preservefinancial stability.
Given the constraints of both of thoseobjectives, try and maximize employment.
It's three parts of the stool.
But I think getting them to deal withclimate change, no,

(13:54):
that's not their remit.
Once you move them beyond their remit, itbecomes very hard for them to actually
do what they are supposed to do well.
But I certainly do thinkthat 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 keepinflation low and stable so that interest

(14:21):
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 onmore than they can actually handle.
I don't think they should besaying, We're the only game in town.
They should pay appropriate respect to thepoliticians and say their mandate is to

(14:44):
build consensus on the way forward,for example, on climate action.
But we will support it in the ways that wecan, and that, I think, would be adequate.
You don't fancy another shotof being a central banker then?
I beg your pardon.
You don't fancy another go atbeing a central banker then?
No, been there, done that.

(15:17):
Excellent.
Well, we're here today basically, so we'vegot a partnership with the FT and
the FT business Book of the Year.
And your Fault Lines book, when it aroundabout 15, 16 years ago, you've been
obviously a number of books since.
And as you mentioned, rather than gotshortlisted for the prize later on.
I just wanted to ask you afew questions around the book.
So what do you think made FaultLines an award-winning book?

(15:40):
Is there a secret sauce?
I wish I knew.
I don't think so.
I mean, obviously, it has to appeal to thecommittee which is making the choices.
I do think they look...
I was surprised at some of the othercompetitors it beat out.

(16:03):
I think at leastmy sense at that time, I don't know if it
continues, is they're looking for newideas, for ways of thinking about
important issues which obviously resonatewidely amongst the public,
but also are new and different.

(16:26):
Very popular journalistic treatments
are good, but they want something more.
That's why sometimes the business Book ofthe Year Award goes to surprising books,
even though there's a morepopular seller out there.

(16:52):
Did the award have any impact onyour career or the book at all?
Well, I'm a card-carrying academic, soI do write books every once in a while.
It was gratifying in the sense thatit certainly did wonders for sales.

(17:13):
That was good.
I mean, Fault Lines was widely readand helped the narrative about the crisis.
But did I change my life as a result?
Probably not because I was already inthe business of writing for a living.

(17:39):
Are there any challenges or memorablemoments when you were
writing the book at all?
Yes.
I mean, look, every book is as much anexperience in learning as in writing.
You read widely, you learn things youdidn't know when you started the book,

(18:00):
and hope that at the end of thewriting, 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 cametogether a lot more easily.
There are some other books.

(18:20):
The follow on third pillarwas a little more open-ended.
What has become of capitalism with all theinequality rising from
trade and technology.
It's only after writing the second or thethird draft that I realised
what the book was about.
Sometimes,they're all learning experiences services,

(18:45):
but it's also a communicationdevice, and it's important that at the end
of it, you understand whatyou're trying to communicate.
Just for any young and aspiring writersout there, is there one piece of advice
you can give them when they'retrying to write books like this?
The easiest advice is write.

(19:09):
You can theorise all you wantabout the structure, et cetera.
Of course, you want to think a little bitbefore 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.

(19:29):
What's the clear message?
Pruning down, of course, differentstrokes for different folks.
Sometimes the bestway to write a book is to write it.
And get that first draft done,and then things get better.

(19:52):
Sound advice.
Raghuram Rajan, thank youso much for joining us.
It's been an absolute pleasure.
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