Notes from Fault Lines talk
Went to a talk today by Raghuram Rajan, "Fault Lines: How Hidden Fractures Still Threaten the World Economy." I quit taking notes before the end, but I think I got the most interesting stuff. Most of this won't be new to you if you've been following the commentary on the crisis.
My favorite part was at the beginning: I'd always thought of rising income inequality as a bad thing, but I hadn't thought about how, in the absence of a credible plan for reducing it, it leads to bad policymaking.
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Fault line 1 - Rising inequality - tough to address underlying problem of high school and college graduation rates - so politicians try to up consumption, in this case home ownership. [But rising inequality has at least as much to do with the transfer of manufacturing overseas]
Fault line 2 - under-spending exporters - japan / china model - it worked! Rapid growth. But weak domestic sector - cartels that work well for manufacturing export not so good for domestic consumption growth. So: savings surplus that has to be absorbed elsewhere.
These exports are our imports. This causes us to run large deficits [really?] which have put us over a cliff financially.
Fault line 3 - jobless growth in the US and an inadequate safety net. Tremendous pressure on Washington to get jobs back. So Fed gives public assurance of easy money to encourage job creation. Globally we are the stimulator of first resort. Leads to excess. This is bad policy.
Putting it together - policy wanted to extend home ownership. Wall of money looking for a home. Financial sector responds with mortgage-backed securities.
"More generally, are bankers evil?" - no but we have an arm's length system in which actors don't see the consequences of their actions. Profit is the only metric of success; it's assumed social value is being created. That's fine, but if price signals are out of whack things can go badly wrong. So this wall of price-insensitive money comes in and ...
My favorite part was at the beginning: I'd always thought of rising income inequality as a bad thing, but I hadn't thought about how, in the absence of a credible plan for reducing it, it leads to bad policymaking.
***
Fault line 1 - Rising inequality - tough to address underlying problem of high school and college graduation rates - so politicians try to up consumption, in this case home ownership. [But rising inequality has at least as much to do with the transfer of manufacturing overseas]
Fault line 2 - under-spending exporters - japan / china model - it worked! Rapid growth. But weak domestic sector - cartels that work well for manufacturing export not so good for domestic consumption growth. So: savings surplus that has to be absorbed elsewhere.
These exports are our imports. This causes us to run large deficits [really?] which have put us over a cliff financially.
Fault line 3 - jobless growth in the US and an inadequate safety net. Tremendous pressure on Washington to get jobs back. So Fed gives public assurance of easy money to encourage job creation. Globally we are the stimulator of first resort. Leads to excess. This is bad policy.
Putting it together - policy wanted to extend home ownership. Wall of money looking for a home. Financial sector responds with mortgage-backed securities.
"More generally, are bankers evil?" - no but we have an arm's length system in which actors don't see the consequences of their actions. Profit is the only metric of success; it's assumed social value is being created. That's fine, but if price signals are out of whack things can go badly wrong. So this wall of price-insensitive money comes in and ...
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