FAULTLESS LINES

This is not because,as has been widely and justly noted,Raghuram Rajan was one of the very,very few who saw something was wrong (in 2005,and that too,speaking at a gathering that was paying tribute to Alan Greenspan) when almost everybody thought the god of high finance was in his heaven; some thought Greenspan was that god. That achievement,which puts Rajan in the class of Paul the Octopus,by itself doesn’t guarantee a fluidly written,beautifully argued and,this will apply if you think about these things seriously,a somewhat frightening thesis on the global economy. Even if you don’t follow economic or finance writings too much,and also especially if you don’t follow,please buy and read this book. Priced just shy of Rs 500 — roughly the price of two multiplex movie tickets — Fault Lines will give you a deeply satisfying experience. Am I over-praising? Am not. The publisher blurbs on the front cover a quote from the Economist book review: deserves to be widely read. Publisher’s blurbs automatically make you reach for the salt. But this one’s spot on. All thinking Indians who think,rightly,this country can make it big in the global economy should read this book. For,the problem for the global economy,as Rajan argues,is that some of the biggies were and are doing things that were and are crisis-friendly.

Rajan’s central thesis will disappoint both what are called the Left and the free-marketwallahs in India; that’s always a sign an argument may be good. The Left will not approve of his point that blaming high finance for greed and worse doesn’t take you very much forward in terms of understanding. Ah,he’s a “Chicago economist”,will be the likely response. The free-marketwallahs won’t like Rajan’s spotlight on income inequality and inadequacy of welfare policies. That’s soft stuff,that’s the fashionable thing to say.

The really smart thing is said by Rajan. American income inequality puts pressure on democratically elected politicians to look for quick fixes. Therefore,cheap credit. And when that cheap credit buys plenty of houses,whose prices go up and lower-income Americans feel even better off — all the better. Or,actually,all the worse.

There was a second source for the oceans of cash that fuelled what we all pretty much happily called the boom. The dollar earnings of export-maniac economies. This is a well-identified and well-understood point,it’s part of every discussion that starts with the phrase “global imbalances”. Rajan,however,analyses this better than most. China arrived at the export-or-explode option,like Germany or Japan had earlier,because of another financial crisis,the Asian one. Then,cheap and plentiful cash from the West had given Asian tigers a massive indigestion. China thought: we will get our own cash. So,sit on the currency,and sell your stuff to everyone else. Even those wearyingly familiar with arguments on “global imbalances” will profit considerably if they read Chapter 3,Flighty Foreign Financing.

Rajan’s next point is that American welfare systems respond well to jobs lost in a slowdown which are quickly replaced by jobs gained in a (government-kickstarted) recovery. When some or many jobs never come back,as it happens when the economy undergoes a structural shift,what’s a democratic government with relentless electoral cycles to do? Whatever it takes. And here,Rajan makes a wonderfully nuanced point.

The way the thing we broadly call the establishment works under such a situation is this: people who provide credit sense that any problem arising out of their having a ball while making the ordinary Joe feel less economically vulnerable will be ultimately the problem of the people who make policy because the ordinary Joe can’t be allowed to hold the can. What choice do governments,especially democratic governments,have?

So what’s to be done? Before we go to Rajan’s prescriptive thesis,let me quote a sentence from hundreds of quotable sentences from this book. Pg 152,Chapter 7,Betting the Bank: “The stock market is not an anonymous,distant entity; it is us,and collectively we feted activities that eventually proved highly detrimental to society.” That’s a Chicago economist speaking. A very smart Chicago economist. A wonderfully intellectually honest Chicago economist. The best bet for answers to capitalism’s travails are to be found in the corner where the guys know there’s nothing better than this system to organise economic activity.

Rajan’s recipe,in short,is: remove the expectation that the government will always save big finance and create better jobs by educating Americans better. Tough? Very,very tough. But are there other choices,Rajan asks,pointing to the fact that oceans of post-crisis government cash to avoid an economic meltdown has created another set of expectations. Add to that recent data on the stickiness of the US unemployment rate.

The book would have provoked any thinking Indian to think about India’s economy anyway. But there’s an Afterword: What Lies Ahead for India. He mentions India’s growing income inequality and the dangers that a social underclass poses to economic future. But smart (Chicago) economist that he is,he makes the following points. One,the poor can’t escape the public sector in India as the middle and upper classes can,so think about government failure,not private greed,when you think of the poor. Two,the private sector can produce charlatans when it comes to service delivery — quacks as doctors,for example — but government energy is dissipated in also providing (bad) services and confusing unenforceable big regulation with smart,light-touch regulation. Three — and this is a superbly argued point — we the middle class rant on corruption but we mostly fail to understand politicians do a crucial job: they act as deliverymen of minimum services to the poor,so the poor,who know many netas are crooks,tell themselves at least “they are our crooks”. This in turn produces a perverse political-economic incentive: the disinclination on the part of the politician to change the system because,it seems to him/her,the change will make him/her less relevant than now.

There are plenty of equally incisive arguments in this short section on India. A short book review can’t do justice to them all. Let’s end by quoting another sentence,from the Afterword on India. “I (the author) have been frank in pointing out the pitfalls (in India’s policy and politics),not because I am pessimistic about India but because I think self-delusion is the first step towards disaster for individuals as for countries.”

Fault Lines should be a fine cure for such self-delusion. Buy it. Read it. Read it again.