Back in 2005, Raghuram Rajan, then economic counselor at the International Monetary Fund, stood up in front of the annual meeting of prominent economists and bankers at Jackson Hole, Wyo., and gave a presentation that his listeners could never have expected.
The U.S. investor community was reveling in the high growth and stable financial conditions then prevalent around the world, but Rajan had examined global financial markets and come to a very different opinion. He argued that increasingly complex markets, which spewed out complicated instruments like credit-default swaps and mortgage-backed securities in ever greater quantities, had made the global financial system a riskier place, not less so as many believed. Such comments were considered near blasphemy at the time, and Rajan’s audience didn’t take him very seriously.
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Three years later in 2008, however, his views proved prophetic. Rajan had generally predicted the sources of the worst financial collapse since the Great Depression of the 1930s.
Today, Rajan, now governor of the Reserve Bank of India, the country’s central bank, is worried again. This time, he’s fretting about the impact of the superloose monetary policies pursued by the U.S. Federal Reserve and other central banks to combat the financial crisis and resulting recession. Long-term low interest rates and unorthodox programs to stimulate economies — like quantitative easing, or QE — could be laying the groundwork for more turmoil in financial markets, he argues.