Book club: Fault Lines

Marta Szczerba likes being shown the big picture

Fault Lines

Raghuram G. Rajan

Princeton University Press, 2010

Picking up the Financial Times and Goldman Sachs Business Book of the Year 2010, I had high expectations. I was curious to see what distinguished Fault Lines from thousands of other what-caused-the-financial-crisis books that have recently proliferated in bookshops. As soon as I started reading, it became clear. While other books describe just one aspect of the crisis such as the collapse of Lehman Brothers or the US sub-prime mortgage market, this book clearly and coherently puts all the pieces of the puzzle together. The text also challenges you to think big - it looks at issues from a global macroeconomic perspective, forcing you to consider what would you do to rebalance the economy if you were the head of an international organization such as the IMF.

Fault Lines boldly aims to identify the causes of the crisis and to offer suggestions for preventing another one. It succeeds, mostly because of the academic acuteness of the author. Raghuram. G. Rajan is one of the few economists who predicted the global financial crisis. In 2005, he pointed out with impressive perceptiveness that incentives were skewed in the financial sector and that this encouraged firms to invest in complex products, which could on occasion fail spectacularly. Needless to say, his argument was heavily criticised as overly pessimistic.

Five years on, Rajan shows the reader how complex CDOs, global trade imbalances, economic inequality and lax banking regulation contributed to the 2007-2009 meltdown. He goes on to argue that global tensions (or "fault lines", as he calls them) which led us to financial crisis haven't yet been resolved. His main argument is that inequality, both within countries and between developed and developing countries, indirectly resulted in phenomena such as asset bubbles that propelled us into recession. He convincingly puts forward the notion that national governments, specifically the US, should promote social equality while international organisations such as the IMF should rebalance the world's economy. This time, Rajan's work has been largely praised.

The book is sobering, partly because it exposes the complexity of the issues - and the difficulty of reaching a global agreement. The author often draws on his own experiences as Chief Economist to the IMF, admitting that rebalancing the global economy will be hard. However, he argues that doing so is the only way to secure future stability.