Fault Lines is another forewarning by the economist and author – Raghuram G Rajan on financial skeletons still hidden in our insatiable wardrobes. The author fears, the causes that had led to the financial crisis of 2007 might have not been fully addressed; hence the financial turmoil may reappear as our tendency to take risk in association with unabashed greed get better of our prudence. It might be a momentary financial relief but what’s the guarantee that it’s not the proverbial calm before yet another storm, this time much larger in its magnitude. There weren’t many takers to his warning note (white paper) when last time he had foreseen a financial crisis in the making in early 2007. This time ignore him at your own peril.
In Geology, fault lines are breaks in the earth’s surface where tectonic plates come in contact or collide resulting in great stress around these fault lines. The author has used the same metaphor as the title of his book cautioning about the fault lines that have emerged in the global economy; and its impact on the financial sector.
The author has cited three major reasons for the fault lines that could prove ominous for the world economy. A) Political stress: Like every financial crisis even the financial crisis of 2007 was a direct result of domestic political stress in the US. The author believes a lot of political decisions taken in the economic powerhouses were popular instead of being financially prudent. B) The second set of trade fault lines emanates from trade imbalances between countries stemming from prior patterns of growth. C) The final set of fault lines develop when different types of financial systems come into contact to finance the trade imbalances. It generally happens when two financial systems based on two different principles come into close contact distorting each other’s functioning. The author cites how still-unresolved fault lines lead to the just-abated crisis and we should be wary of them or another depression would pop-up its ugly face again.
Through the book Rajan has tried to address certain unanswered questions such as – why are poorer developing countries like China financing the unsustainable consumption of rich countries like the US? Why did Federal Reserve keep rates so low for so long? Or more importantly why did financial firms make loans to people who had no income?
At times the writing would seem highly pessimistic, for sceptics, but one would guess times are such you have be distrustful of the sudden recovery. Is it all a sham? A must read word of warning.