How Raghuram Rajan had predicted world will fall into a hole

Raghuram Rajan’s 2005 prediction of a financial crisis, made at the Jackson Hole symposium, is famous. But that prediction had more twists than generally thought.

Rajan Almost didn’t Make the Prediction

At the 2005 Jackson Hole symposium for central bankers – this is a yearly do, a very prestigious one – Raghu’s paper was initially planned around the theme that financial innovations like derivatives reduce risk.

Rajan changed his mind at the last moment

But as he finished his research, he found derivatives were making the system riskier – because big banks were using them as profit-boosting and not risk-shedding instruments.

Summers, who could be next head of Fed, had called Rajan names

So, Rajan presented his paper, ‘Has Financial Development Made the World Riskier’ at the symposium. The star audience included Lawrence Summers, who’s now a front-runner for the post of US Fed chairman. Summers laughed off Rajan’s argument, called him a Luddite.

Summers Still Has to Answer for That

US media repeatedly makes reference to Summers’ dismissal of Rajan in 2005 while assessing his suitability as Fed chairman. Rajan, by contrast, got glowing assessments in global media when appointed as RBI chief.

Rajan predicts more crises

Our central banker had in his 2010 book, ‘Fault Lines’, predicted world will go from “bubble to bubble”. His argument: America’s income inequality, trade deficit & its banks continuing to reward high risk-taking together create conditions for more bubbles, which eventually burst