In an interview, Prof. Raghuram Rajan of the Booth School of Business draws a connection between the causes of the financial crisis, and the recent concern about the start of a currency war.
The interview was published on “Spiegel Online” on 10/11/10. Prof. Rajan argues that the technological change since the 1980’s led to an increase in the demand for highly qualified employees in the US, which could not be satisfied by the universities. Thus, the discrepancies in income and wealth between large groups of people without high qualifications and those who have them led politicians to insist on lower interest rates, according to Prof. Rajan. By this, they tried to replace the (long term and costy) need for better access to education with (short term and seemingly cheap) wealth for all, says Prof. Rajan.
Today, he argues further, countries are frantically trying to restart their economy by either a very lax monetary politics, or by interfering with their currency (yes, think about China!). Both protectionary instruments lead to too much liquidity and wealth bubbles, concludes Prof. Rajan.
Now, too much liquidity and wealth bubbles fatally remind me of certain events in 2007/2008! But this time, it seems to be caused by measures which are designed to jumpstart economies, not to re-enact the events before the Lehman meltdown. Therefore, I think that the highly qualified people concerned in New York, Beijing and other financial centers should very carefully think about whether protectionistic actions are more beneficial to a national economy than a global restauration of trust and effective and fair monetary markets.