Recent Global Financial Crisis

Raghuram Rajan is the author of the book Fault Lines: How Hidden Fractures Still Threaten the World Economy. The book focuses on the financial crisis that affected the economy in the years between 2007 and 2008 that shook the economic systems of countries especially in the Western world. The book describes the reasons for the economic breakdown as fault lines that worked to accentuate financial problems to the extent that it reached maximum levels in 2007, whereby the global economy was put at risk. The instabilities are additionally described from a political and economic point of view as portrayed by the author with experience in finance as a professor in the University of Chicago. The book delves into the issues that brought about the financial crisis in terms of policy, banking and economic problems as well as monetary policies. The objective of this paper is to analyze the author’s view on the recent global financial crisis and its impact on the understanding of economic issues and examine the explanations and bring out the suggested methods of preventing global crises in the future.

Main Arguments

Rajan attributes the crises to inequality on the basis of income due to disparities in access to basic amenities such as education and housing. For instance, the lack of housing is described as a product of government initiation of programmes that lend money for housing to persons with poor economic and income backgrounds. This is also viewed from a political perspective as the home-ownership programmes continued throughout the Clinton and Bush administration. In addition, Government Sponsored Enterprises (GSEs) compounded the matter further by collaborating with banks and other stakeholders to raise interest rates and the price of housing. In terms of education, the author emphasizes that the US has failed to create a policy that invests in human resources. Rajan indicates that the policies at the time focused on the less skilled sections of human capital in the country. This argument is firm in that the economic developments in education and housing have been insufficient to steer the economy through innovation. This is in addition to the lack of transformation in attitude for the citizens. On the other hand, public policy rater than the two factors is the major determinant of attitude and consequently the recurrence of a crisis.

Trade Imbalance

Trade imbalances are also depicted as major fault lines that resulted in the financial crises. These are explained as disparities in finance and investment in the world economy whereby the government may exercise control over markets as in an economy that is grounded on production. The author attributes foreign financing by countries in the developing world to under or over investment (Rajan, 2010). This implies that the country needs the financing in order to maintain growth in the area of export. The author compares the lending system in the country to that of the developing world as it is characterized by non-development and lacks incentive. In addition, he states that economic growth based on exports has impacted significantly on the US economy. This is due to the fact that inactive industries in the developing countries exert pressure on the foreign market that is expected to import the countries’ products. This fault line is clearly a contributor to the crisis as the integration of efforts with other countries in the world is needed for stability.

Export-Led Growth

The author further expounds on the issue of trade imbalances with focus on emerging markets such as China as well as Japan and Germany. The author makes a comparison between the pioneer developed economies such as the US and developing economies on the basis of organizational structure. Rajan explains that export-based economies are heavily reliant on foreign demand with the eventual imbalance in trade relations. For instance, China is regarded as an export-led economy that relies on foreign demand. This is a major area of instability in the global economy that as trade and finance are closely linked with the impact that the exchange rate is destabilized. Ultimately, instability of exchange rates exposes the world economy to a financial crisis as trade issues remain unresolved.

Unemployment Recovery

The final fault line discussed in the book touches on politics and expenditure on the part of the public. This is due to the relationship between the finance ministry and authorities in charge of monetary issues. The instability in this case is associated with imbalances on the basis of job security, assets and investments. Rajan argues that individuals that lose their jobs use political means to generate work through projects that require stimulus finances. The author further postulates that the stimulus is driven by past motives and ideology rather than the immediate requirements. Financial stability is threatened by the unhealthy association between jobless recovery and monetary policy. This is due to the fact that reduced interest rates increase risk and credit while inflating asset prices. This argument is agreeable in that the unemployment problem persists and calls for individuals to focus on innovation and reinvestment of the economy.

Relation to Global Economic Issues

The problems highlighted in the text by Rajan are evidently related to current issues in the global economy and aids in understanding the various challenges facing the economy today. The fault lines described in the book such as trade imbalances are crucial in preventing the occurrence of another financial crisis. The book has successfully explained various concepts in the global economy that have increased understanding of the operations and issues in trade as well as other financial sectors. For instance, the author has emphasized on the need for cooperation among countries to avoid trade imbalances.

The book enables the reader to understand financial systems and their operations as well as the role of the government in domestic and foreign markets. In addition, the author has explained previous financial crises in developing countries such as Mexico and used the illustrations to argue on the cause of the recent economic breakdown. The book has also studied foreign financing and the impact of export-led economic development. It has also expounded on the impact of relying of foreign consumption and demand by countries rather than the domestic market. This has resulted in the conclusion that stability in terms of trade is yet to be realized in the global economy as it is characterized by deficits in countries such as China. This is further compounded by the lack of stability in world currencies.

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