The Messiah of Economics?
Raghuram Rajan is being hailed as the second coming of Christ or tenth avatar of Vishnu by most in the media. There has been a lot of breathless gushing and swooning, with the media playing the role of teenage girls to Rajan’s Justin Bieber. A brief sampling of the head lines.
From The Times of India
Raghuram Rajan: Engineer-turned economist with a rockstar’s appeal
From the Economist
A Star Economist is put in charge of India’s Central Bank
From the Telegraph
India’s financial prophet Raghuram Rajan to run central bank
Independent Media Hard at Work
These news articles usually begin with how Rajan predicted the financial crisis. At the Jackson Hole Economic Symposium in 2005 Rajan presented a paper, that raised concerns about the financial sector. However, Rajan was hardly the only one who had raised these concerns. Academics like James Crotty and Greta Krippner, had also been pointing out the hazardous dominance of the FIRE (Finance Insurance Real Estate) sector in the economy before the crisis. Neither of them however have managed to become media darlings, and continue to toil in relative academic obscurity. While the media treats Nouriel Roubini, another famous prognosticator of the crisis as somewhat of a crank, going so far as to label him Dr. Doom.
What Rajan pointed out in 2005 was plain enough for anyone who paid attention to see, mainly that housing prices could not go on rising forever and the entire house of cards* built upon this assumption was destined to collapse sooner or later. If economists and other so-called experts failed to see the impending catastrophe it is not because it was difficult to see but it was because they did not want to see it. Just like the story of the Emperor and his new clothes. I have no idea why he is being hailed as a Messiah for stating the obvious, which he did in a good well reasoned paper, it was not like he came up the economist’s equivalent of the General Theory of Relativity.
So since 2005 has he been speaking truth to power? A sampling of his columns tells a different story;
1. Why blaming bankers for the crisis is a bad policy: Shorter Rajan, the government made banks loan money to poor people and that was responsible for the housing bubble and the resulting crisis. The last time I heard this claim trotted out was during the Republican Primaries by Romney and Gingrich. A claim debunked by both Federal Deposit and Insurance Corporation (FDIC) and the Federal Reserve.
2. Is finance too competitive? This column is so full of fail that I don’t even know where to start. I may have to do another post on it. One gem, towards the end of the column, he wants banks to be regulated just like any other industry, open to the forces of what he calls creative destruction. So no FDIC?
In short he has been writing things that comfort the comfortable, and make Paul Krugman mad. Tighten your seat belts India, and squeeze your buttocks, you are in for a bumpy ride, you have just handed the keys of your economy to a devotee of Schumpeter.
*House of cards refers to the securitization of the mortgages, rating agencies determining the mortgage backed securities to be investment grade (AAA), creating the over the counter derivatives to hedge against the mortgage backed securities and so on. In short creating layer upon layer of complexity not to mitigate risk, though that was the cover story, but to make profit, every step of the way.