Fault Lines: Book Review

Let them eat credit, is the first chapter of Raghuram G Rajan book 'Fault Lines'. Rajan explores further a hypothesis that the great recession was caused by failure of median incomes in the United States to grow. While at the same time the incomes of the top 10% have grown considerably. A range of factors have contributed to the stagnation of median incomes including technological change, the increasing importance of having a college education and the decline of manufacturing. The political class feeling pressure from their constituents. Applied pressure on both Fannie Mae and Fannie Mac to make cheap credit more readily available. This cheap credit fuel a housing boom and led to growth in construction. As long as house prices continued to go up the middle class continued to believe their wealth was growing.

Rajan also explores the impact much of the developing world's export led growth strategies have impacted upon the West. Countries such as Japan, China and even Germany have grown in the post war period on the back of exports with their consumer spending suppressed by the government's control of the banking sector. Instead of using the US dollars earned through exporting to purchase goods or services from the United States the exporting nations lent them back to the debtors nations allowing those nations to continue purchasing their goods. The book details the incompatibility between the West's arms length financial system and the developing world's more controlled system. The limitations of the efficient market hypothesis are discussed in this context.

The now familiar failures of the American financial system are also discussed and notion of whether returning to "boring banking" is either feasible or desirable. The book provides an interesting discussion of the pros and cons of returning to a more regulated financial system.

Overall this book is an interesting read for anyone interested in the global financial crisis and provides a far deeper analysis than the superficial analysis provided by other material on this topic such as, Inside Job. The main message of this book is that the sub-prime crisis though a failure of both markets and government was simply the outlet for a economic situation caused by the meeting of faultlines in the global economy. The message I have taken away from this book is that we can't simply re-regulate to prevent this crisis from happening again we need to deal with the underlying cause of the current crisis.