auto-hp family

Customer reviews

4.7 out of 5 stars
4.7 out of 5 stars

on 17 June 2016
Where to start? Obviously Raghuram Rajan is a talented central banker and professor of finance. The readers ought to know the rating reflects my views of the author's arguments in the book and not the author himself. There are major flaws in every chapter of the book including the essay on India in the paperback version.

Let me summarise the top 5 major flaws in the book point by point. There are many but I am going to write down only major 5 that form the theme of Rajan's argument.

1. Rajan argues that rising income inequality in America led the US Congress to pass the Community Reinvestment Act to appease their voter base. He further argues the Act pushed Banks to lend to families whose credit was subpar thus creating subprime loans that eventually created the housing bubble that burst when the borrowers started defaulting on their mortgages. There are two major drawbacks with this argument. The number one is discussed in this point. Let's for instance assume Congress did push the greedy Banks to lend to low-income families. However the percentage of home ownership barely budged during the bubble. Most of the new loans created during the expansionary phase of the bubble were mortgages held by existing homeowners on the second, third or fourth houses that Banks actively allowed. The new subprime loans were bundled and sold off to foreign investors as complex but safe MBS by the Banks with the knowledge that those were toxic assets or in the beautiful language of one Goldman executive: those were 'S***ty' (4). Financial fraud taken to the next level non of which is discussed in the book.

2. As for the second drawback among the two pointed above, Rajan vigorously argues that issue of income inequality and its causes which he thinks is the widening gap of education and skills among the working class. Although he mentions that this is not the only cause but there are others, he does not give an iota of thought and explanation to financial deregulation, tax breaks for the rich and tax hikes for the poor, absurd corporate CEO and executive compensation relative to median income employee. Even with the Skill biased technical change explanation for income inequality, the major problem is that the explanation has been debunked by James K. Galbriath (5).

3. Nowhere in the book, Rajan uses the term 'Wealth Inequality'. The grotesque level of wealth inequality in modern America is unheard of in the industrialised world. The Financial crisis of 2008 as a credit crisis has its origins (excessive private debt although debt that was subprime which led to excessive borrowing overall) in the increasing concentration of wealth among the top decile and particularly the top one percent and primarily among the one tenth of one percent. Let me explain. As is the case, national income comprises capital income and labour income. Now inequality in labour income is making the middle class rely on credit for consumption while the top income earners (the top decile) are making investments with their excessive income. This cycle, since 1973, has led to increasing concentration of wealth in few hands. This excessive wealth concentration will lead to ever increasing share of income from capital going to the same wealthy families (6). One glaring omission of Rajan in the book is about the ever increasing corporate monopoly across industries. The Four Big Banks to Big Pharma to Internet Behemoths to Electronic Giants to Four Media conglomerates etc. Corporate profits soared while the income from labor stagnated since 1973. Such a drastic outcome begs some explanation when discussing about a crisis whose explanation centres around income inequality.

4. Rajan, when discussing the case of economic development in chapter 2 and 3, made numerous arguments that crumble down in the face of some simple mathematical calculations of consumption and investment for a developing country. He discusses the case of Germany and Japan and how their export-led growth strategy allowed the United States to consume their surplus deepening the fault line. He also argues that because Taiwan had a small domestic market, the country had no choice but to rely on exports. But with the case of China, he states that although China has a huge domestic economy, it too has followed the path of export-led growth. Rajan's glaring ignorance in the face of such pattern is striking since export-led growth strategy has been the only path by which a late comer industrialised. If Germany, Japan, South Korea, Taiwan and now China followed the export-led growth strategy relying on the US to consume, so be it. The surplus capital flow into the United States can depress the long term interest rates in the US but it is up to the Bankers to exploit the situation, keep the political system bent to its will and commit fraud and create a world financial crisis or not do all these things. Rajan is now the Governor of the Reserve Bank of India. He is in-charge of monetary policy of the soon to be world's most populated nation. It would be a colossal mistake if he ever states India has a huge domestic economy in the context of the country's growth story.

5. As with the Wall Street, this book fails glaringly in the face of evidence. The efforts of the Commodity futures trading commission to regulate derivatives met with intense opposition from wall street in 1999. Derivates were excluded from the Commodity Futures Modernization Act of 2000. Wall Street prevailed and the unregulated derivates decimated the Financial markets leading to the crisis. The efforts of Citibank and Travelers Group to merge and force Congress to repeal Glass-Steagal exposes the extent to which the financial deregulation and wall street meddling in government policy contributed to the crisis. Goldman Sachs, JP Morgan, Morgan Stanley, Meryl Lynch, Lehman Brothers all have the share of the blame for the cause of the crisis. In the end it was all about Government or Wall Street. Who was responsible? Rajan puts the blame squarely on the Government and its policies at the same time he portrays the Bankers as good people and they only did what they did - making deals that offer the best returns - was they went after the money as they always do. The truth being that Wall Street's greed and power bent the government to its will while engaging in fraudulent activities that led to the crisis. Now it does not seem surprising that the book was the winner of the Financial Times-Goldman Sachs Business Book of the Year Award 2010.
0Comment| 18 people found this helpful. Was this review helpful to you? Report abuse
on 13 February 2016
This review is for Rajan's other book - Saving Capitalism from capitalists, which is equally good.

This book is an impassioned and erudite defense of the free markets enterprise system. Raghuram Rajan, a Chicago economist, currently the governor of the Reserve Bank of India, presents a breathtaking bird’s view of the development of the arm’s length financial system, variedly known as capitalism, globalization or the free markets system.
The book’s title is revealing. Saving capitalism from the capitalists. The authors contend that capitalism’s worst enemies are the capitalists themselves. Who are these capitalists? The industrial and financial incumbents in a national economy, who conspire to stave off the financial markets so as to choke the sorely needed finance to those innovators and entrepreneurs who seem to threaten the existing economic order. These status quoists present the mortal danger to capitalism, the authors aver.
The book is divided into 4 parts. The first part emphasizes the basic premise that finance liberates and goes on to prove it with empirical analyses. They beautifully juxtapose a poor stool maker in Bangladesh against the savvy MBA graduate in America, and draw an economic comparison that transcends narrow socio-political factors. Theirs is a simple, yet powerful argument. The arm’s length financial system, which they define as the one where the lender is at an arm’s length from the borrower (a Chinese wall so to speak), as seen in the equity and debt capital markets, enables even the most downtrodden in the society to rise above the perennial curse of poverty, when financial innovation and engineering work to present the needy with the capital to undertake simple entrepreneurial activities that would ensure his survival, and providing the investor with the requisite returns on the risks so taken.
The authors’ main contribution is the delineation between the arm’s length and the relationship based financial systems in the capitalist world. The authors tear the mask off of the pretentious capitalists, thereby bringing clarity in the existing obfuscated notions about capitalism. Arm’s length financial system works by marrying capital and entrepreneurship without having them in direct contact. The capital markets such as debt, and equity epitomize this, where the investors or lenders in all probability never meet the entrepreneurs who are the ultimate users, underpinned by a solid, vigorous financial system, capable of evaluating and diversifying risk, through myriad players including credit ratings agencies, and regulators. Collusive practices borne out of years of constant touch, rampant in even the most regulated (in fact, even more so in the over regulated) of banking environments are minimal. A pre-emptive strike against corruption is achieved. The authors present the example of post war Japan. The Japanese banks connived to tie the Japanese corporations permanently to them. The public, reeling under economic hardship, were convinced that the villain was the capital market. The political class got together with the incumbents to form a Bond committee, whose permission would be required for corporations to issue equity or debt in Japanese markets, effectively placing the wolf in charge of the chicken coop. AAA rated Japanese companies like Toyota were forced to seek finance from the banks at extortionate costs of capital, said to be akin to daylight robbery by some historians. The general public had one important avenue of investment cut off. This went on unchecked for decades, the banks relinquishing their control only in the 1980’s in the face of international competition, which enabled Japanese companies to circumvent local markets and issue bonds in Europe. The authors conclude that for capitalism to succeed in improving welfare, vibrant capital markets must take root.
Prominent economists such as Joseph Stiglitz, Amartya Sen prescribe sequencing of financial reforms to prevent crises such as the East Asian one in the late nineties and the one in Russia post the Soviet Union collapse. They posit that the domestic economy be exposed to stiff foreign competition only after the local companies have become stronger. The authors aver that it is precisely this policy that allows the incumbents to steal the thunder right under the nose of the avuncular, credulous public. They have enough clout to get protectionist bills passed through to the detriment of the larger public, have policies enacted that favor them. The existing banks have material private information about companies seeking finance due to the long term nature of their relationship, enabling them to hold these companies hostage. For should they refuse them finance, no outside entity would step in. After all, if the bank with its open access, deems the corporation unfit for financing, why would anyone else? The lot of the corporations is also not so bad. They may effectively be tied to the bank, but this lack of access to outside finance also means fewer upstarts competing for a share of the market. A cozy relationship emerges among the incumbents who all go to the same elite clubs and hatch closed door deals, putting a spanner in economic growth. Transparency is the first victim. And then the dark side of finance emerges-wastage of resources, value destruction, concentration of political power (resources) in the hands of the inefficient, prompting those with economic power to undertake fewer entrepreneurial ventures. The Bombay club in India, formed in 1993, was such an offshoot of the progenies of incumbent industrialists who had made merry during the license raj era and were now frightened at the prospect of foreign competition.
Obscene corporate excesses and scandals, resulting in social and political upheaval become the norm. And the system becomes socialistic in character, albeit under the guise of capitalism.
And uprooting these incumbents proves an even more daunting task than at the beginning. Only international competition forces them to give up their hold on power. A sequential reforms policy thus brings more harm than good. Trade and capital liberalization is the way forward for rapid strides in the economic arena.
Give the capitalist system a chance, the authors plead. Not all financiers are the Shakespearean Shylocks. Excesses do happen and exacting a pound of flesh is surely an excess. But in a world where no effective mechanism exists for a guarantee of repayment of the invested capital, nobody would be willing to part from his capital, even at the most tempting rates, fearing moral hazard. It is also the financial system that comes up with innovations like reverse mortgage that give the elderly a shot at a respectable retired life, viatica that supplies the terminally ill with the much needed medicines, and health care.
The question must come to the enquiring mind –if the capital markets are so good, why did it take them so long to arrive and why are they continuously challenged and threatened. And the authors do not disappoint on this score. They take the reader on an enchanting odyssey through the late nineteenth century to the present. Critically presenting, analyzing and dissecting the financial history. Their analysis of the emergence of free capital markets in the 1890’s, the flourishing in the first half of the twentieth century, and the subsequent suppression in the period between the two world wars that extended to the 1980’s is nothing but superb. They finely critique the process by which capital markets emerge-the resistance they face early on; the continuous challenges posed by the incumbent industrialists and financiers; and how circumstances conspire to tie the interests of the naturally antithetic classes ‘the industrialists and the workers’ together leading to their commingling. They join hands to demand protection from insalubrious competition-domestic and foreign. The politicians are spurred to action- imposing restrictions, quotas, tariffs. Financial markets are deliberately suppressed. The authors cite multiple empirical studies that show how such actions inexorably lead to an economic crisis.
The arguments are persuasive, finely backed as they are, with empirical studies. After showing how the markets were suppressed till the 1980’s, they go on to show how the failure of Bretton Woods agreement led to their revival. The spectacular global economic rise in the past 3 decades was seen because of the reemergence of free capital markets. To put things in perspective, India’s own superlative economic performance came about only when the archaic license raj structures were pulled down in the early 1990’s. India’s public sector banks had also more or less stifled access to finance to all but a few, leading to the emergence of a few dynastic industrial houses, who were in the thick of things to pocket all the government projects and contracts. And in those days, corporate profitability was determined not by market competitiveness but by the government projects seized. A classical sign of the diseased relationship financial system. It’s the unshackling of the economy that led to India’s current position as an economic powerhouse.
The book is structured into four parts, the first one champions the case of free capital markets, alleviating concerns about the hedonistic lifestyles and behavior of some financiers. The second is an exposition of how the markets emerge-the challenges (government, incumbents) to be overcome. The third is an analysis of the recorded history when the free markets were again suppressed, which ends with an investigation into the weaknesses of the systems that replaced free markets. The fourth and the most important is on- making markets politically legitimate, socially acceptable, and addressing the risks that are inherent, to make them more palatable.
The authors advocate several policies to aid the suffering of those who get displaced in the ‘creative destruction’ of the competitive process. The unemployment debates raging on various political and policy fora are now spilling onto the streets. The cyclic unemployment, part and parcel of business cycles, which though painful, was accepted in the belief that when the economy starts booming again, the unemployed would regain their jobs. However, the 2000’s have shown a worrying trend. Jobless recoveries. Monetary and fiscal measures put the economy back on track, but investment doesn’t pick up, unemployment persists. Structural unemployment is increasingly replacing cyclic unemployment. Jobs are not temporarily unavailable, they are getting permanently lost. Technological innovations, brought about by the free markets enterprise, have made tremendous contribution in enhancing human knowledge and made life easier. But they have also made several human skills redundant. The jobs that are lost now are because of automation, not business cycles. This has made the unemployed see the capitalists as class enemy. Wall Street excesses, accounting scandals and exorbitant salaries highlighted particularly in economic downturns are making the public antagonistic towards the free markets. Calls to restrict foreign trade, protection for industries (championed by both the management and the workers- who fear losing their jobs) are becoming increasingly shrill. The authors provide the penetrating insight that, when everybody has open economies, it is difficult for a single nation to have closed borders. In the same way, when everybody starts enacting beggar-thy-neighbor policies by turning the spigot off, the incentives for domestic pro-free markets agents become weak (whose goods no longer have access to foreign markets) and economies become isolated, reducing the discipline imposed by international trade and competition, effectively putting the clock back.
In times such as these, when lampooning globalization has become the latest fashion trend in the august drawing rooms of the intellectuals and the high society, this work is timely, and most sobering. It masterfully exposes the hidden agendas of the incumbents-industrial and financial and how those in whose best interests it is to embrace free markets unknowingly fall prey to them. It is not a diatribe against anyone or anything, which is too often the case with books that purport to educate its readers. It is an impassioned defense but with a healthy dose of dispassionate analysis. This book was written in 2003 (while the Indian revised edition was only recently released, to capitalize on Mr. Rajan’s popularity in India following his elevation as the governor of the RBI), but is even more relevant today with the 2008 financial crisis, Euro zone crisis and weaknesses in global economy, threatening to derail the good work of past decades. Raghuram Rajan who had predicted the 2008 crisis and has written a riveting book on it (Fault Lines), has again proved to be prescient with the kind of drama unfolding today in the debates about economics in a post crisis world that Mr. Rajan prophesied almost a decade back. Anyone with even a passing interest in economics and finance would surely find this book enriching. It also serves as a textbook outlining the financial institutions and markets underpinning the international monetary system. It should in fact be made required reading in business schools. The authors have a humble aim, which is to educate readers. Anyone, who ventured to complete it, would undoubtedly agree that it has done so.
0Comment| One person found this helpful. Was this review helpful to you? Report abuse
on 25 December 2016
I never bought this book from Amazon. I had to do a book review for a training session I was part of and I stumbled upon this book accidentally. The very fact that the name of Raghuram Rajan was attached to it added to its appeal, and despite the fact that it appeared to me as a hardcore economics book, I decided to go ahead with it. The book deals with the background and all the events that lead to the 2008 US Housing Financial crisis. Being from a non-economics background, it has to be stated here that at first, all the terminologies and technical text felt overwhelming and I had to my homework in order to at least have a little grip on what the book deals with. It needs to be said, despite having spent hours on the subject matter, I still cant say that I have fully understood the concept. There are still lots more to understand. But as far as the book is concerned, it’s a YES. The book is a well made one, and you know it when you realize the entire history of the subject matter has been dealt in a chronological manner. What makes this book a must read is the fact that this book summarizes the events that had occurred before the financial express, especially the fact that Raghuram Rajan had predicted the crisis well before in 2005 itself, only to be laughed at by others. Despite that, this has been an impersonal attempt, a successful one , by him to understand and make others understand about the intricate details that went behind the worst crisis of our times. And Raghuram Rajan doesn’t distance himself from his Indian connection, despite the fact that most of his professional life and work has been outside India, prior to being assigned the job of Governor of RBI. He has given details about his life in India as a child. There is also a chapter dedicated to India and the lessons that India needs to learn from this crisis.
If you are not familiar with certain economics terms, I would recommend having the smartphone ready with you, while you are reading this book.
0Comment| 4 people found this helpful. Was this review helpful to you? Report abuse
on 22 June 2016
Any work which is prophetic in the sense that it fore warns of an imminent crisis is great when the prophecy proves to be true. It is even more great if it suggests causes of the crisis which most of the people afflicted with a tunnel vision are simply unable to see. Fault Lines fulfils both of these criteria. Further, it suggests remidies for avoidance of similar situation in future, which humans, if they intend to survive on this planet for a long term must take seriously.

Rajan has successfully seen the cause of the crisis in the increasing chasm between the rich and the poor and the flow of goods and services from the producing non-American world to the debt ridden USA. He has found fault with the system and not with individual players.

But I think we should go a step further and ask as to what mentality is causing this to happen? In my humble opinion it is the doctrine of "wealth maximisation of share holders". A little before reading Rajan's brilliant book or even a review of it I have propounded this in my book "Tightening Noose of Poverty" which is available on Amazon at: and in abridged version at:
0Comment|Was this review helpful to you? Report abuse
on 5 March 2016
The SubPrime crisis of 2008 has puzzled many,the equivocal nature of various academicians just pushed me to pick a book that
answers the underlying fault lines which forced the even the infallible to fall.
This is a master book with precise arguments, this doesnt just state the problem but addresses it too.
The only shortcoming of the book which cost it that one star is its lack of historical reference to earlier booms and busts, the book should have mentioned why and how the world broke down this way and what was the difference from the previous recession, these things are as imp as pointing the fault lines in today's context.
Now the positives, the language of the book is quite easy and even the person who is not familiar with economics jargon can comprehend it. The author mentions the reason for distrust b/w IMF and Developing/Under developed Countries which is quite commendable and comes from a first hand source. Another good thing about the book are the solutions given ranging from easy to implement to very imp reforms.
Another thing is, as he is the current RBI governor you can comprehend the intent behind his actions as somewhere they bear a close resembling to the suggestions he gives in this book.

P.S. My personal favourite are the India, China essay.
0Comment| 2 people found this helpful. Was this review helpful to you? Report abuse
on 27 January 2014
Being an amateur reader in financial economics, I read a couple of books on investment strategies, how to put the world economy back on the bull, affects of capitalism-good/bad etc. But I must say, this is one of it's kind. The author, the youngest one to become a chief economist at IMF and many other credentials to his CV, had put his experience at the IMF, American Financial Sector and teaching experience at Booth School into this book. He underlines some dangerous contemporary trade/financial instruments(fault lines) that when stretched to their limits can spell the end of the financial system as we know it. Finding these fault lines is not all that he addresses.
Unlike other critics instead of just criticizing what's wrong the system, he puts forward some steps the world leaders must take to bring the global trade, capitalism, social equality back to stability for a bright future of our existence. He also puts in some of the points he discussed in his other book-Are capitalism and democracy failing us? He explains the interconnectedness of the financial-political-trade sector, it's reach, affects on the average Joe, and how he must compel his representatives for a stable outlook.
0Comment| 6 people found this helpful. Was this review helpful to you? Report abuse
on 4 January 2018
'Thank you, Dr. Rajan, for writing this book', were the only words that resonated inside me when I was reading the last chapter of this book.

This book is perfect to ignite the mind of how the economics and game theory (including international and domestic political scenarios) play out in the real world. This is a must-read book for all the students of social sciences, and especially economics, not because this gives new theoretical ideas of how economies work, but because any knowledge and powerful persons without the right direction do more harm than imaginable, and this book put the most influential ones in the courtroom - economics and us, the common people.

This book is worth to be made a must-read book before awarding Bachelor or Master degree in Economics.
0Comment| 2 people found this helpful. Was this review helpful to you? Report abuse
on 5 October 2013
There are no second thoughts while I am writing this. This is the best economic masterpiece, most succinct, precise and aptly supported and backed up work I have ever seen.

It's not only informative and knowledge enriching but is pretty interesting as well. And most importantly, the way Rajan describes things, it really clears everything right up from the surface to the bottom-most layer.
The book has been awarded Goldman Sachs Business Book of the Year Award 2010.

This is what Indian Express has to say about this book:
"Brilliant. No other word for it....Buy it. Read it. Read it again."

Thanks to Raghuram Rajan for such a wonderful work. I am on my third chapter now and already found myself immensely adulated..
Surely Indian economy is under pretty good hands with Rajan acting as RBI's Governor...

Ratings: 5/5

Recommendations: Don't miss it even if you are an amateur in's worth a lifetime experience.
0Comment| 16 people found this helpful. Was this review helpful to you? Report abuse
on 7 May 2015
You need at least a little knowledge of the financial markets to be able to understand the scenarios explained. Having no knowledge whatsoever of sub-prime lending, securitization, money and fiscal policies, mortgage refinance, etc., I could only appreciate the general stuff, almost like enjoying a mirchi bajji without the mirchi.

Some pages (e.g., 235-244) are just general words of wisdom, nothing specific to Wall Street or any country. This is a good book no doubt but nothing "Brilliant, no other word for it" as Indian Express described it. Superlatives are cheap these days. This is exactly the kind of mentality that is lamented in the book as one of the causes for the 2008 crash: going overboard.
0Comment| 3 people found this helpful. Was this review helpful to you? Report abuse
on 13 August 2017
It is an excellent book. It goes behind the sub prime problem. It also show how the politics lead to sub par policy in absence of people understanding the correct thing. Further it is far superior book, one of the problem in India is people believe and expect from government, basically govt is major problem/hurdle bt nt the solution. We should rationally think we we have fallen behind some of poorest east Asian economies. The politicians love in interference in every sector. One important thing I would like to remind to the people what Milton Friedman visionary economist said that when govt have too much power industrialist take over that. Author has also written an excellent book on the subject saving capitalism from capitalist. Excellent book highly recommended.
0Comment|Was this review helpful to you? Report abuse