Posts Tagged ‘Raghuram Rajan’


The Indian government has just made a rather interesting new appointment. It concerns the man who is to head the country’s central bank. The man is… well, he is rather clever and well regarded across the world. But what makes this one so very interesting, is that talk is that Barack Obama’s choice for the next boss of the Fed is rather controversial. And what is really really interesting is that amongst the critics of Obama’s choice is the man who is set to take over at India’s central bank.

Okay let’s name some names. The man who is to take over at India’s central banks is Raghuram Rajan – former chief economist of the IMF and the author of ‘Fault Lines’. In his book, Mr Rajan postulated the theory that surging house prices were used by western governments as a way to kind of compensate for the fact that real wages were rising only very slowly. So, during the boom years, the gap between the super-rich and everyone else grew, profits to GDP rose while wages to GDP fell, and median workers in many countries found that over a period of many years – years of boom that is – their real disposable income didn’t grow at all. These were not good developments. We should have had recession when demand was suffocated from the economy. Instead, the money that companies were not spending sloshed around the system, eventually leading to lower interest rates, more credit, more mortgages, higher house prices, more household debt, and a consumer boom based on leverage.

Mr Rajan was one of the most prescient of the world’s economists and his theories to explain what was charging the boom and then the crash are probably spot on.

Now to change the mood a little: consider the Fed. The Fed’s deputy chair is Janet Yellen, and she is the person many want to see take over from Ben Bernanke next year. Talk is that Barack Obama wants Larry Summers to have the job. Now Summers was US treasury secretary under Bill Clinton – a massive critic of QE – and was the man whom many hold responsible for loosening the stranglehold of the Glass–Steagall Act, which separated investment and retail banking. Summers is not liked by Republicans and quite a lot of Democrats have their doubts about him, but he is a heavy weight in the world of international finance and politics – there is no doubt about that.

Many of the world’s top economists are critics of Summers, including the likes of Paul Krugman and Joseph Stiglitz, and Raghuram Rajan of course. Let’s say it happens and next year Summers and Rajan are both central bankers. For once when India’s central bank meets up with the Fed, many will see it as a meeting of equals – that will come as quite a shock for a US that is used to having things its way.

As for India, the appointment of Rajan may yet prove to be a key moment as the country attempts to re-establish itself as one of the world fastest growing economies.

© Investment & Business News 2013

It used to be a magic formula. Never mind what is happening in the real world; in industry, in business. Never mind what is happening with wages and productivity. If house prices were rising, households felt as if they were better off, and went out and spent more as a result.

It happened in the UK. It happened in the US. Raghuram Rajan, a former chief economist at the IMF, argued in his book ‘Faultlines’ that rising house prices in the US made up for the growing gap in income distribution. So during a period in which median wages in the US hardly changed, house prices surged on the back of low interest rates, and plentiful supply of credit.

Government backed agencies Freddie Mac and Fannie Mae also helped to ensure that house prices only ever rose, and that consumers – most of whom had forgotten the very concept of savings because it no longer appeared necessary – enjoyed the perception of growing wealth as their home rose in value.

It ended in tears of course. These things do. Maybe it will end in tears again, this time with bond prices, as factors beyond the control of central banks force up inflation and in turn lead to higher real interest rates.

But in the UK, George Osborne came up with a cunning plan in his latest budget. It is called “help to buy” and is there to give first time buyers who can’t rustle up the necessary deposit a lift onto the housing ladder. He is also looking to help existing home owners move up the ladder, too.

It’s a bit like a UK version of Freddie Mac and Fannie Mae, and, of course, if our George can engineer house prices upwards, consumers will feel richer, spend more, and electoral success may belong to the Tories.

Alas, Andrew Brigden, a senior economist at economic consultancy Fathom, does not see it that way. He said: “Help to Buy is a reckless scheme that uses public money to incentivise the banks to lend precisely to those individuals who, absent the scheme, would not and should not be offered credit… Had we been asked to design a policy that would guarantee maximum damage to the UK’s long-term growth prospects and its fragile credit rating, this would be it.” And to that the ‘Daily Mail’ and ‘Daily Express’ exclaimed with delight: “Look!– House prices are set to soar,” they said.

And with that, George Osborne is now preparing to create economic recovery with two new discoveries. Apparently, two plus two equals five, and black is white.

© Investment & Business News 2013