Fault Lines

Raghuram Rajan was one of the few economists who warned of the global financial crisis before it hit. Now, as the world struggles to recover, it is tempting to blame just a few greedy bankers who took irrational risks and left the rest of the world to foot the bill. In Fault Lines, Rajan argues that serious flaws in the global economy are also to blame, and warns that a potentially more devastating crisis awaits if they are not fixed. Rajan shows how the individual choices — made by bankers, government officials, and ordinary homeowners — that collectively brought about the economic meltdown were rational responses to a flawed global financial order in which the incentives to take on risk are incredibly out of step with the dangers those risks pose. He traces the deepening fault lines in a world overly dependent on the indebted American consumer to power economic growth and stave off global downturns. Alongside, America’s growing inequality and thin social safety net create tremendous political pressure to encourage easy credit and keep job creation robust. In the process these put the rest of the world in deeper financial peril, even as the economic choices of countries like Germany, Japan, and China place undue burden on America to get its policies right. In Fault Lines, Rajan outlines the hard choices that the world needs to make to ensure greater stability and restore lasting prosperity. Importantly, he shows how India’s development experience is different from that of other recent fast-growing economies. Despite India’s recent successes, however, he argues that India has to act decisively in certain areas to maintain its people-oriented growth. If India does so and continues on its unique development path, it will be a compelling role model, demonstrating how it is possible to grow rapidly even while having a flourishing democracy