Fault Lines: How Hidden Fractures Still Threaten The World Economy

Raghuram Rajan’s book “Fault Lines: How Hidden Fractures Still Threaten the World Economy” provides an in-depth view of the forces that brought about the worst financial and economic crisis in at least half a century and look at what can be done to prevent the next one. Rajan argues that the reasons for the crisis are more complicated than just blaming one single stakeholder (e.g., financial professionals, regulators, government officials), rather, there are serious flaws in the economy. Each stakeholder may have acted in their best interest, but he argues: “because in an integrated economy and in an integrated world, what is best for the individual actor or institution is not always best for the system.” Rajan describes the reasons using the metaphor “fault lines” – the crisis developed along three fault lines where intended and unintended stresses arose. These eventually created pressures to emerge in economic and financial markets.
Rajan’s first fault line is domestic political stresses, especially in the United States. As income inequality rose 1990s in the United States, the government’s response was to provide easy credit. The government tried …show more content…
Many of the world’s developing and large economies were growing more dependent on American demand for their exports. These nations were left with weak locally-focused sectors. Because these economies were reliant on experts, the result was huge trade imbalances among countries - this created the fault line. Specifically, economic policies in countries like the United States and the United Kingdom used offshore savings to support the spending of its citizens. Developing economies, as well as Japan, Germany, and China took the opposite approach – they provided the savings the other countries needed. Rajan argues that the resulting imbalances exacerbated the financial crisis and is not sustainable in the longer