August 6, 2013

Raghuram Rajan New RBI Governor on US Economy

Raghuram Rajan, the new Reserve Bank of India Governor, on the US economy -
From BusinessWeek’s 2011 profile on Raghuram Rajan 
Rajan champions the "freshwater," free-market argument that Federal Reserve Chairman Ben Bernanke is risking another dangerous asset bubble by keeping interest rates too low for too long. That puts him in the same camp as such conservatives as John B. Taylor, Treasury Under Secretary for International Affairs in the George W. Bush Administration. Rajan faults Fannie Mae (FNMA) and Freddie Mac (FMCC) for pumping too much money into subprime mortgage loans and the Community Reinvestment Act for pressuring banks into extending credit to supposedly underserved communities.
Raghuram Rajan vs Paul Krugman 
Such views have not won him praise from the "saltiest" thinkers. Princeton's Paul Krugman, the Nobel laureate and New York Times columnist, blasted Fault Lines in The New York Review of Books, scolding Rajan for "buy[ing] into what is mainly a politically motivated myth." Rajan responded in The American, the magazine run by the conservative American Enterprise Institute, with "Many Are the Errors." "Perhaps Paul Krugman believes that by labeling other economists as politically extreme, he can undercut their credibility. But his is badly weakened by the myriad errors he makes," ran the story's subhead. It was just the kind of language you'd expect from an economist with a signed poster of Milton and Rose Friedman on the wall of his office.
He produces statistics showing that Americans in the upper income echelons are doing fine, while those in the middle and the bottom are losing ground. Borrowing by those less successful groups allowed them to spend as if they were better off than they really were, but it couldn't last. It would be far wiser, Rajan argues, to deal with the root causes of inequality by helping the poor and middle class get a better education so they can be more competitive in the now-global labor market.
The article also has an apt quote on politics 
Acemoglu cited a line attributed to Republican Senator Mark Hanna (1837-1904): "There are two things that are important in politics. The first is money, and I can't remember what the second one is."

Tags: raghuram rajan vs paul krugman, new RBI governor, raghuram rajan fault lines