A Cautionary Tale from the World's Most Influential Economist

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.Raghuram Rajan

Raghuram Rajan is an expert in the finance of economic growth. In 2005, his paper “Has financial development made the world riskier?” warned of the problems that subsequently led to the global financial crisis. The Economist recently named him the economist with the most-important ideas for the post-crisis world, and his 2010 book “Fault Lines” was named Business Book of the Year by the Financial Times and Goldman Sachs.

Rajan was Economic Counselor and Director of Research at the International Monetary Fund – its chief economist – from October 2003 to December 2006, the youngest person ever to hold the position.  He is a professor of finance at the Booth School of Business at the University of Chicago.

A video of this interview is available here.

Dan Richards interviewed Rajan at the annual CFA conference in Scotland on May 11.

In your talk this morning, you concluded on a note of qualified optimism.  You forecast “sunny with thunderstorms” in the short term, provided that we get things right going forward, and you voiced midterm optimism, but that was with a big proviso.  What do you see that public policymakers have to get right to get broader economic growth globally?

In the very short term, dealing with the problems of sovereign debt in Europe must be front and center.  You don't want to rattle the financial markets all over again, and you need to find a sensible way to contain this problem.  There was a strategy of muddling through that seems to be reaching its limits, and how to get ahead of the problem is something that we need to think about.

Similarly in the United States there is certainly a short-term worry about the fiscal deficit.  My sense is that the United States has a little more room than Europe has, and the main issue is to be aware of the problem and to put in place structures or processes that will lead to some kind of resolution in the next couple of years.  The US has a little more room in part because Europe has bigger problems.  In that sense, the US is fortunate.