RAJAN HAS BEEN PRAISED as one of the few who saw the crisis coming, but he has also been roundly criticized for his book as well as for earlier remarks. Former Treasury Secretary Larry Summers suggested a paper Rajan presented at the 2005 Jackson Hole symposium was misguided.
In a post to his New York Times blog, Nobel Memorial Laureate and economist Paul Krugman called it “deeply depressing” to see Rajan argue that money spent by the US Congress to expand low-income housing and the inflow of foreign capital removed any discipline on home loans. “That’s a claim that has been refuted over and over again,” Krugman wrote.
Two years after the publication of Fault Lines, Rajan holds no grudge against his critics, yet his judgment on the financial community is still harsh. “Prior to 2008, the tenor was ‘Yes, we can see those problems, but the system has taken care of them before and can do so again.’ We were overconfident about the system’s abilities, when in fact we did not have the tools to deal with such a crisis.”
Disregarding the massive amount of leverage in the system, the financial community remained blissfully undisturbed, despite the magnitude of the looming disaster, Rajan observes. “Private bankers assumed they had things under control. The central bankers’ usual solution was to throw money at the problem to solve it, and they thought they could repeat that.”