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Markets, discipline yourselves

Ben Chu
raghuram rajan 150x150 Markets, discipline yourselves

"Government did it"

Martin Wolf is complimentary about the new book of the Chicago economist and former IMF chief economist Raghuram Rajan in the Financial Times today.

I’ve not read Fault Lines – and I’m sure Wolf is right to praise it. The thesis of rising US inequality driving economic instability sounds interesting. But he does quote one argument from Rajan’s book that sounds very suspect to me:

“[the financial sector’s] failings in the recent crisis include distorted incentives, hubris, envy, misplaced faith and herd behaviour. But the government helped make those risks look more attractive than they should have been and kept the market from exercising discipline.”

But wasn’t market discipline the central philosophical principle of Alan “hands-off” Greenspan? Wasn’t the animating theory at the Federal Reserve that letting the banks rip in the credit boom would be fine because none of them would be so stupid as to bankrupt their firms? There was plenty of free market. There just wasn’t any discipline.

Of course, what Rajan is probably referring to is the US Community Reinvestment Act and low policy interest rates, as he has before.  But the idea that the blame for the credit meltdown can be blamed on the public sector, rather than the private sector, doesn’t get any more convincing however often it is repeated.

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