Fault Lines, Raghuram Rajan, 2011

Posted: September 9th, 2013

Fault Lines, Raghuram Rajan, 2011

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Fault Lines, Raghuram Rajan, 2011

            In chapter one, the author looks at the growth of labor and learned population within America. There is a decrease in the number of skilled and educated people in America because most people have opted to enroll in institutions of higher learning. This is given by the deficiencies attributed to the education system and economic diversity. From this chapter, I learnt the negative and positive effects of technological advancements. Technology has led to advanced communication means and loss of employment opportunities (Rajan, 2011). It is important for individuals to become acquainted with the new technological advancements so that the relationship between education and economic growth is enhanced.

In chapter two, the author points out the differences between rich and poor countries. He says that poor countries lack organizational structures for effective and efficient deployment of physical capital and unproductive human capital. State owned corporations are autonomous from the government and political interferences in their operations. From this chapter, I learnt that governments in rich and poor countries use different measures to attain sufficient wealth and economic growth. Governments play an important role in the formation of adequately equipped corporations for cheap production of goods. Governments intervene in terms of price regulations, availing incentives and resources provision.

In the third chapter, the writer demonstrates the effects of debt in developing countries. Most investors would leave without prior notice and full regard to the country’s fundamentals. This chapter informed me on the capabilities of financiers to leave on short notice and hold short-term equity claims on poorer countries (Rajan, 2011). I have also learnt that export-led growth could lead to an upsurge of foreign exchange reserves for the exporting countries. Developing countries need to consider all necessary factors when choosing financiers.

Chapter four gives the story of Badri who was laid off during the 2008 financial crisis without retirement benefits. The company could not pay him because it had been declared bankrupt. According to the writer, the United States in under a weak safety net due to the asset bubble that prompted the 2008 financial crisis, whose affects the world is still reeling from today (Rajan, 2011). From Badri’s story, I learnt that it is important for economies to have a safety net especially for low-income earners. A strong safety net would save vulnerable individuals from tough economic pressures such as healthcare and mortgage payments. It is therefore the responsibility of the government to shelter the low-income citizens from financial crisis.

In chapter five, the author asserts that the Federal Reserve was responsible for the financial crisis. When the first recession struck in 2001, the Federal Reserve kept interest rates comparatively low. This led to an upsurge in fund circulation within and without the United States. Federal Reserve failed to set adequate interest rates to promote economic growth, as the rates only favored a select few. I learnt that the Federal Reserve should have regulated the markets before and during the financial crisis by setting market-related interest rates. Therefore, the Federal Reserve was responsible for the creation and bursting of the bubble.

In chapter six, the writer says that financial systems require adequate and proper regulations. The 2008 financial crisis was caused by lack of control and limitations by the Federal Reserve allowing investors to make profits at the expense of other businesses. Banks and the private sector are also to blame for the crisis (Rajan, 2011). Investors in the United States sought global markets on their investments given by the low interest rates within the country. I also learnt that mortgage brokers sought clients through their attractive repayment packages, which turned out to be false.

Chapter seven gives an indication of an estimated 60 percent of mortgages rated as AAA whereas only few of all corporate bonds are actually rated AAA (Rajan, 2011). The author asserts that AAA rated mortgages were worthwhile because they offered higher returns as compared to corporate securities. Some of the biggest entities such as AIG lost billions of dollars during the financial crisis. From this chapter it is apparent that banks had risky investments, which highly contributed to the financial recession in the country. Housing mortgages became defaulted for both investors and the banks. This showed laxity in terms of risk management within the affected entities. Consequently, the government should ensure that reforms are implemented within the financial sector players in order to avoid financial crises.

In chapter eight, the author looks at the measures to be taken to avoid financial crises and close what he described as “fault lines” within the financial sector (Rajan, 2011). Politicians supported capitalism that ultimately collapsed. Capitalism needs far-reaching reformations with an aim of preventing another recession. From this chapter, I learnt that democracy in terms of making financial decisions should be restricted by establishing the best financing activities in order to increase benefits to the citizens. In addition, all financial institutions and entities should be included in the new reforms.

In chapter nine, the author asserts that inequality in terms of finances is harmful to the economy. According to the writer, it would be wise to reform the education system as a start towards a brighter economic future (Rajan, 2011). Education at an early age teaches young people responsibility, excellence and nurtures their abilities. Tertiary institutions should be encouraged to practice on-job training in order to enhance acquired skills. From this chapter, I learnt that in order to create better safety nets in the financial arena, it is paramount for the government to reform insurance and healthcare.

Reference

Rajan, R. (2011).Fault lines: How hidden fractures still threaten the world economy. Princeton, N.J: Princeton University Press. Print.