Fault Lines: How Hidden Fractures Still Threaten the World Economy
By Raghuram G. Rajan
Princeton University Press, 2010, 272 pp.
Balancing the Banks: Global Lessons from the Financial Crisis
By Mathias Dewatripont,Jean-Charles Rochet,Jean Tirole
Princeton University Press, 2010, 160 pp.
Here are two worthwhile books motivated by the financial crisis. Rajan, the author of Fault Lines, is a former chief economist at the International Monetary Fund and one of the few who, as early as 2005, foresaw serious weaknesses in financial systems. At the time, his warnings were not well regarded in official or financial circles. He takes a sophisticated and subtle global perspective with a simple but questionable underlying thesis: that in the early years of this century, the United States pursued excessively stimulative monetary and fiscal policies out of concern for persistent high unemployment, thereby creating high demand for imports, leading to large trade deficits. These policies, the argument goes, relieved other countries (mostly notably China, Germany, and Japan, but many smaller countries as well) from pursuing more stimulative policies at home, since jobs could be created domestically by exporting to the United States. Why did political concern with unemployment arise in the United States? Rajan blames the country’s weak social safety net: unemployed Americans get modest unemployment compensation for only six months and often lose their employer-based medical insurance, and they can hardly afford private medical insurance (if they can get it) on their meager unemployment benefits. Thus an important part of the solution to global imbalances, Rajan argues, is improved provisions for low-income Americans.
Balancing the Banks, by three French economists, focuses on what went wrong with financial regulation and how it can be strengthened. It offers an excellent appreciation of the intrinsic dilemmas involved in regulating financial institutions, along with an explanation of why regulation is necessary, and addresses, among other topics, how to deal with distressed banks. The book provides a useful non-American view of the financial system, with lessons from practices in European countries.
Both books end with the observation that in an increasingly globalized economy people need to give more authority, or at least more weight of opinion, to institutions charged with taking a global perspective, whether it be financial regulation or macroeconomic management.