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Book Review: Fault Lines

Raghuram Rajan made a name for himself at the Jackson Hole conference in 2005, which was a kind of send-off for the victorious Alan Greenspan.  Alas, but the paper he brought was not appreciated at the time, as it pointed to imbalances in the financial system.

He was ahead of the curve.  Thus his book on the economic crisis deserves our attention. More than most, he sees the problems in a global way, across nations and across asset classes.

His view is that for a variety of reasons, income inequality grew in the US, and in order to paper over that, the government encouraged a credit-oriented society to allow people to stretch for prosperity, hoping that the debts would not catch up with them.

It was a fool’s bargain.  Debt deceives average people.  They overestimate their ability to repay, and end up defaulting at high frequencies.

Like me, he is critical of the Fed’s monetary policy during the ’00s as being too easy.  The “Great Moderation” was a result of over-stimulus, not of sound policy.

Similarly, he faults banking regulation for being too easy, leading to private profits with public risk.

This is a well-written book from a man who was ahead of the curve.  I recommend it.

Quibbles

Where I differ with Dr. Rajan is how easy it would be to fix income inequality in the US.  He suggests a number of policies, many of which sound good, but have the Federal Government intervene in matters that they can’t handle effectively.  Persistent unemployment is a problem, but should that be handled by the Federal Government.  Far better in my opinion that it be handled informally and locally, by family and friends, that there would be more urgency, and more willingness to compromise in finding work.

Retraining is a good thing, but also not something the Federal Government does well.  One of the beauties of the US is that we have community colleges, which can retrain people at modest costs.

He also levels a decent amount of the blame at Fannie and Freddie and the Community Reinvestment Act, for making too many lousy loans.  He is correct in direction, but not likely in degree.  Yes, they were problems, but not the leading problems.

But these are mere quibbles on an otherwise excellent book.  If you want to buy the book, you can buy it here:  Fault Lines: How Hidden Fractures Still Threaten the World Economy

Who would benefit from this book

Anyone who wants a comprehensive view of the crisis would benefit from this book.  It does a fairly complete job, and is not long at ~230 pages.

Full disclosure: The publisher sent me a copy, because I met the author at a conference, and asked to receive a review copy.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.






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3 Responses to Book Review: Fault Lines

  1. jdmckay says:

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    David:

    Thanks for this review. Seems to me Rajan hits the critical points w/more clarity then most of these “How did this happen” books.

    Also seems to me, like some of the others, his proposed “fixes” lack sufficient specificity to be useful… although, IMO he at least points to possible solutions which, at least in principle, are (again, IMO) in the right direction.

    However, I differ w/you on your critique of some of these fixes. You oft sound the Reaganite them that “government can’t do (fill in the ____)” as you do here. You generalize:

    “(…)but have the Federal Government intervene in matters that they can’t handle effectively. (…)

    That’s all well & fine. But the implied resource for these “fixes”: private enterprise, community colleges, “free market”… none of these conceptual entities has gotten the job done, much less address or acknowledge what’s happened during their crime spree this decade. Worse, they’ve sucked the life out of economy more then any government program ever did, and rewarded small % of people for activities which not only added no value, but (sure looks to me like) net contribution was on the negative side (eg. no value contributed… a net taking).

    Your comments about community colleges… well, these things are on life support across the county. With exceptions here and there, an overall degradation in quality of their programs, availability of classes, and cutting edge technology they address has been drastically diminished, despite what Bill Gates says. And this drain continues (same w/state’s Universities) as budgets are in the red and fallout from their “investments” this decade continues to erode balance sheets.

    The one thing government could do is… TELL THE TRUTH. Do some honest investigation into nuts & bolts of US economy, identify badly neglected priorities (water, energy), and focus public attention on the need for addressing these things in an intelligent manner.

    Coming off this financial “crisis”, one would have hoped that a somewhat intelligent society (US) could/would access things and make some meaningful corrections… particularly given scope of malfeasance. But that just hasn’t happened.

    Both Fed & state govs look to me as more of an expression of private enterprise’s wish lists and ideology then a meaningful critique of their failures. Coming up on mid-term elections, I see little more then choices being:
    * stay the course (BO)
    * “back to the future” repubs sounding increasingly juvenile, not to mention either mis-informed or just plain utterly corrupt.

    Private industry (finance/banking, tech, energy) has not addressed problems, is not investing in what we need, and is dominating back channel politics in corrosive manner. We seem incapable of having even a semblance of intelligent conversation about climate change, despite massive evidence a tipping point is approaching w/accelerating speed & consequence from which the globe will not be able to pull back by human intervention (even if there was a will to do so).

    Somewhere, somehow, by any means possible… it seems to me we must get honest about things. I see no signs of that, whatsoever.

    Even worse, for those few watching, mega-corp interests are accellerating buying & imposition of privatized water all over the globe… an implementation of “free market will solve problems” by extracting increasing fees from various populations w/little or no improvement in management/delivery/infrastructure/usage of this precious resource. I mean, really… how can anyone expect, given massive excesses this decade tipping economic activiity away from what’s wanted and needed to ensuring false positive balance sheets… how the hell is this “system” going to deliver society efficient, well thought out water?

    I don’t know David… your antipathy for gov solutions is understandable. But where’s the course corrections going to come from?

    I’ll tell you what I’d like to see: your profession band together and form consensus describing cancer in it’s functioning, and needed corrections. And don’t be afraid to call out the crooks. Then the same thing from energy people, and infrastructure pros… the whole nine yards.

    Then these groups of “concerned citizens”… get vocal. Like, really vocal. Build consensus beyond self interest. Cut out hacks that try and push a given group this way or that.

    Things are not good. We’re heading backwards, not forging ahead. I think, as you’ve said in past, US citizenry is up for a very rude awakening in their standard of living, more so in availability of resources (natural & knowledge based) we’re going to need to turn around.

    We need more principle based, very well thought out consensus problem identifying and solving, and it needs to dislodge the increasing mass of self-interested rhetoric that dominates US activity.

  2. jdmckay says:

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    And BTW, just to clarify: I’ve been reading your posts assiduously for several months… maybe (IMO) most informative, useful stuff you’ve written on Aleph since I’ve been around. I really appreciate all you do that goes into this, and your work product.

    So thanks.

    I also think, however, given what’s happened on US shores these last (especially) 10 years or so, that there are no sacred cows, whether in ideology or practice… at least that’s the point at which I’ve arrived.

    The cows that should be sacred: honesty, integrity, even a semblance of good will… the marketing people put these things out there a whole lot for business and politics, but their media representations over and over belie motives not evident in meaning behind those words.

    Too much is broken, and too little is contributing to health of society. The broken parts have mass and inertia disproportional to the small % of interests controlling them.

    I asked (suggested?) a while back you consider a discussion engaging in the question: what is a principle.

    I’ll put that out again. It’s something I put a lot of effort in thought/investigation/trial & error over the years, and I suggest building agreement and distinction on an understanding of just what a principle is would be useful.

    Among other things, I have found over the years that really good ideas/people/work products often materialize from (at least in my experience) from unsuspected sources. I also found that my own prejudices (eg: pre judged… un examined sacred cows, sometimes conscious and sometimes not) obstruct my awareness of “unsuspected sources”. I think this is a shared human condition, and I also think it is an overcomeable one given sufficient will and integrity.

    And I also think I have proven to myself over and over that overcoming various prejudice has great value for me personally, beyond just recognizing pockets in creation which said prejudices obscure. I think overcoming this stuff increases my vitality and “aliveness”, and leaves me more funamentally prepared to be meaningfully useful.

    With that in mind, I’ll suggest to you a definition of principle (borrowed and summarized from Bucky Fuller’s screeds: SYNERGETICS and (especially) a href=”http://www.amazon.com/Synergetics-Further-Explorations-Geometry-Thinking/dp/0025418807/ref=sr_1_20?s=books&ie=UTF8&qid=1280583282&sr=1-20″>SYNERGETICS 2):

    Principle: something which behaves the same, every single time, without a single exception.

    It seems to me this definition is utterly useful. It also seems to me that, explored and understood meaningfully, the distinction(s) implied between this definition and the vast array of very vague, untested notions put into practice under the moniker of this word (eg: “free market principles”, “conservative principles”, “progressive principles” or even “Christian principles”) reveal a convoluted mish-mash of untested but adopted ideas.

    And whole swath of these things guide so much functioning in US (and others, but degradation from what I suggest as principal to various local, self-interested myths)… unquestioned and untested, but ideological guides nonetheless.

    I suggest to you that some of your assumptions regarding gov fall into this category (myth). And I say this not because I’m for more government intervention into “stuff”, but rather because (in my view)…
    a) our fed government has become utterly dysfunctional, corrupted and/or ignorant of processes and “duties” which in our democratic system, government is assigned, by agreement, responsibility for. Whatever shortcomings prior to millenium (and there were plenty), the acceleration of malfeasance: special interest influence into functioning of (especially) federal government, through the Bush years went off the charts. Yet, the corrosive influences in this process are the loudest/most influential voices which decry the incompetence of government… that anything government does private enterprise can do better.

    Seems demonstrable to me this is a myth… utterly false.

    b) disproportionate representation of very wealthy private enterprise interest dominates US “policy” discussion, to the exclusion of whole lot of self-evident reality. I would suggest that US ME endeavors this decade should/could be exhibit A in such a “discussion”, but simple acknowledgments of voluminous facts/actions over decades seems a process which we are incapable of engaging. There is saturating propoganda infused intentionally in US public’s awareness of this escapade, to the exclusion of anything resembling reality. Or in other words, no truth.

    c) In your field… finance/investment, corroding influences I summarize in b) were/are similarly dominant. As I’ve asked here and more places (and to more people) then I can count: how many US citizens can articulate… even generally, a semi-accurate anatomy of the dominant moving parts which led to the event we refer to as “greatest financial crisis since the great depression”? I know very, very few. And this is among a lot of very smart people… MIT doctorates in engineering, lot of CPAs and MBA(s), not to mention the aging (70/80 yr olds… including my parents) who worked a lifetime and played by the rules only to see much of their safety net go up in smoke… while the forces that be don’t really give a rip as long as DOW seems to be going up (regardless whether it’s another bubble, as many like me believe).

    I can tell you this: I’ve been in biz 3 times. 1st 2, fairly small (floor/glass contractor, then small manufacturing biz), the last somewhat substantial (custom software shop w/highly technical & successful flagship product which I sold in ’05 and left me w/a few $m retirement). Through all this, I always endeavored to do things the right way. It wasn’t until last endeavor (software) I got pretty good at it.

    I also learned to read the landscape w/my own eyes, and over and over saw crisises coming before they manifest… avoided the big hurt.

    There are quite a few things I am very capable of doing and would like to be doing. However, given my savings, my wife’s, my (almost 90 yr. old) parent’s and my wife’s mom’s savings (in totality, around $5m), managing that stuff has become a near full time job because of the unreliability of “professionals” generally entrusted w/doing this task.

    Or to put it bluntly: a full time job moving that pile from currency to currency, from this & that, just trying to stay ahead of what I see as crooks in high places. In the last 4 months alone… w/cries of “EURO is doomed” from mouths of “experts”, to similar stuff about China, to enduring strength of USD… I’ve made about 15% against $USD by following my best judgment contrary to most every “expert” I know.

    That this has become necessary simply to keep crooks from evaporating what I worked a lifetime for… these circumstance need not be and shouldn’t be. That doing this keeps me from doing a whole lot of productive work that needs doing only further highlights the breakdowns in society… explicitly so, in my experience.

    What a waste.

    So again, back to a meaningful definition of principle: somewhere, somehow, if fundamental moral underpinnings in society are to grow roots, it seems self evident to me that these “things” must be comprehended by a significant mass of citizens.

    The “virtues” (if you will)… and the rewards and real value of practicing them… all this needs weight, evidence and convincing. And to do this, language (words) backed up by real action of people living and producing based on these “virtues” needs to be in evidence.

    Seems to me engaging in an understanding of “principle” is a damn good place to start.

    Imagine what would happen to creation if gravity took a day off? Fuller’s (my summary above) definition fits the functioning of gravity (and so much else) w/in this understanding. Human virtue does as well.

    US politics, finance, infrastructure and vision for the future lacks any such underpinning that I can see. And from what I can see, the current chaos and utter mis-appropriation of our human and physical resources reflects that… to the extent that my analogy above of (gravity taking a day off) is close enough to results in US society of principle taking (at least) a decade off.

    There’s a whole lot of governments around the globe doing a whole lot better job than ours. When it’s all said and one, government and societies are expressions of the people in the culture’s agreements upon what they value. It also seems very evident to me that a lot of the cultures doing much better than US these days put a much higher value on keeping the minds, eyes and ears of their respective citizenry accurately informed, not to mention authentically resourced (eg: think for themselves).

    And it shows up in their work products, general social well being, improving infrastructures, not to mention vision (eg. addressing challenges of future) of many of their people.

    If US’ bankers had tried to pull off what they did in Singapore, they’d be in prison for life and possibly less a limb or 2.

    Given extent of US slide, AFAIC it hardly seems relevant to evaluate the functioning of our government in terms of government, as it’s functioning as been misdirected in action and purpose, so thoroughly, that it really doesn’t resemble any useful concept I have of government at all.

  3. [...] (positive) review of Raghuram Rajan’s “Fault Lines.”  (Aleph Blog also [...]

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David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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