Monetary politics and the crisis

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.


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5 Responses to Monetary politics and the crisis

  1. olexa5 says:

    Great ending critic. I believe it will always be the problem that each official will feel the need to create something he would name as big during his term. Similar, on a national level: Stuttgart 21. Thus it will be difficult to convince them to a step wise approach of restructuring, but therefor sustainable and overall sensible, instead of chasing a god like image to capture their ‘accomplishment’ for the public, without caring for long-term problem solving.

  2. rudi2020 says:

    Good article, nicely concluded.
    G20 meets next week and leading financial ministers already today.
    -B- ! Maybe you are able to keep us posted about news on the “currency war”.

  3. Well done, well spotted. Both issues – the “currency war” as well as the extreme streams of liquidity – are highly problematic aspects theses days. We have to wait and see whether the political actions taken today will really solve our problems – IN THE LONG RUN…

  4. Pingback: Watch out for those…! | BraveNewFinance.

  5. Pingback: What’s up in 2011? | BraveNewFinance.

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