Fault lines How hidden fractures still threaten the world economy In 2005, a man was roundly scoffed

d at by a group of luminaries who had gathered to celebrate Alan Greenspans legacy. His crime? In those heydays of financial prosperity, he claimed that the world was headed for financial disaster. As it turned out two years later, he was right. This man was none other than Raghuram Rajan, the current economic advisor to the Prime Minister of India. Through his latest book Fault Lines, Raghuram Rajan argues that the roots of the calamity can be traced back to three sets of fault lines. The first set of fault lines stems from domestic political pressures, especially in the United States. Under this, the author talks about the rising income inequality in the United States. The rising inequality combined with poor safety net creates pressures on politicians. However, instead of improving the competitiveness of labor force, the government has chosen the easier option of enabling credit to sub-prime borrowers. So, the first set of fault lines leads to easy credit to fuel consumption. The second set of fault lines emanates from trade imbalances between countries. Here the author focuses on trade surplus countries, such as Germany, Japan and China. These countries rely on exports for growth and so are excessively dependent on the foreign consumer. Now this excess supply is absorbed by the borrowers in US, UK and Greece which results in a bubble. The indebtedness grows to the point where these countries cannot afford any further spending and the bubble bursts. The third and final set of fault lines develops when different types of financial systems come into contact to finance these trade imbalances. In this case the foreign investors into US implicitly assumed that the US government would back the mortgage agencies like Fannie Mae and Freddie Mac. Consequently, the funds from the foreign private sector flowed into the highly rated mortgage-backed securities. Finally, you bring these three dots together and this is how the story goes - United States is politically predisposed towards stimulating consumption, the surplus countries depend on foreign consumption for growth and finally, investors from developing countries finance sub-prime mortgages. So, consumption in US increases till it is no longer affordable. The bubble bursts and crisis precipitates. To summarize, the book traces the crisis to three sets of fault lines domestic political pressures, trade imbalances and incompatible financial systems. At the end of it all, you might not agree with every single point that the book makes but the book will definitely make you think and question your biases against particular countries.