UNIVERSITY OF CHICAGO: …“Competition is central to the free enterprise system, but getting access to things like education, health care, and finance is also critical,” [Raghuram] Rajan says. “We take for granted that everybody has the same opportunities, but they haven’t. And when people start out at very different levels and don’t have the same ability to take advantage of opportunities, they could turn against opportunity and try to shut things down for others.” …
In 2005 Rajan was on leave from Chicago Booth, when as chief economist of the International Monetary Fund, he was among those invited to celebrate the legacy of the Alan Greenspan era. For his presentation, he asked his staff to gather data on the widespread use of new financial instruments, and the results took him by surprise: The new tools meant that banks had become riskier, not safer, over the past decade. The paper he delivered questioned the expansion of financial markets and warned of a “catastrophic meltdown,” drawing a storm of criticism…
Widening income inequality in the United States is one of three root causes behind the crash, Rajan writes in Fault Lines. With middle-class earnings stagnating, politicians who wanted to lessen the pain helped make borrowing and buying homes easier— particularly for low-income households—so people could afford to keep shopping. In addition, the fears engendered by the thin U.S. unemployment safety net ensure that job creation becomes priority one in downturns. But when private firms have other constraints holding them back, government and Federal Reserve stimulus can be excessive, as was the case from 2001 to 2004, Rajan contends… (more)
