Raghuram Rajan Quotes

Not taking risks one doesn't understand is often the best form of risk management.

it is not because of the benevolence of the baker that we eat fresh bread every morning but because of his desire to make money.

And more than the quality of its institutions, what distinguishes a developed country from a developing one is the degree of consensus in its politics, and thus its ability to take actions to secure a better future despite short-term pain.

Policy making invariably involves taking measured risks in the face of uncertainty, for one has neither a prior template nor the luxury of indecision.

A book is almost always a collective effort, even if it has only a single author.

A forced equalization of wages that disregards the marginal contributions of different workers will deaden incentives and lead to a misallocation of resources and effort.

Autobiographies are always written as if the author had it all mapped out with perfect foresight, ignoring the risks and uncertainties at that time. This misleads, as much as those beautiful photographs of a past holiday abstract from the heat, the mosquitoes, and the lack of connectivity.

We have all been hacked, the only question is whether you know it or you don’t’.

Finance is not just about lending, it is about recovering loans also.

My name is Raghuram Rajan and I do what I do.

the rule of thumb’ referred historically to the maximum width of the stick with which a man could beat his wife without breaking the law.

Nationalism, coupled with great faith in the power of the government to enact domestic bargains between labor and capital, has been seen before: it was called fascism then.

India is becoming a large middle income country, too complex and varied to be controlled centrally. The government will need to withdraw from occupying the commanding heights of the economy, confining itself to providing public goods and the governing framework, and leaving economic activity to the people.

Cynical as it may seem, easy credit has been used as a palliative throughout history by governments that are unable to address the deeper anxieties of the middle class directly.

I thought there might be some grand design I did not understand, but the government’s policy clearly was not working, because India was still poor. I was determined to learn more, so I became interested in economics. This book is another unintended consequence of the government’s policies.

We have long understood that it is not income that matters but consumption. Stripped to its essentials, the argument is that if somehow the consumption of middle-class householders keeps up, if they can afford a new car every few years and the occasional exotic holiday, perhaps they will pay less attention to their stagnant monthly paychecks.

decision by consensus is inherently conservative.

Excessive rural credit was one of the important causes of bank failure during the Great Depression.

The Indian public would benefit from more competition between banks, and banks would benefit from more freedom in decision making.

developing countries typically have higher inflation, and developing countries also have higher growth.

the single most important task in management is to pick good deputies,

Should the Governor disappear from public view and not speak for fear of misinterpretation, or should he take the risk in order to discharge his responsibilities?

mind is a terrible thing to waste, and the United States is wasting too many of them.

Government, even in a democracy, can be captured by a small, well-organized class that has little interest in seeing broad-based access to finance.

No institution is bigger than the people who work for it.

On 10 September 2008, Raghuram Rajan, noted economist and honorary advisor to Prime Minister Manmohan Singh, delivered a speech at the Bombay Chamber of Commerce where he spoke about how most of India's billionaires did not derive their wealth from IT or software but from land, natural resources, and government contracts or licences. He spoke of India being second only to Russia in terms of wealth concentration (the number of billionaires per trillion dollars of GDP). To show how extraordinary this number was he quoted the case of Brazil which had only 18 billionaires despite a greater GDP than India. Or Germany, which had three times India's GDP and a per capita income 40 times India's but had the same number of billionaires. 'If Russia is an oligarchy, how long can we resist calling India one?' he wondered.

they will naturally focus only on dealing with a few scapegoats, not just because the system is harder to change, but also because if politicians traced the fault lines, they would find a few running through themselves.

Society suffers when any of the pillars weakens or strengthens overly relative to the others. Too weak the markets and society becomes unproductive, too weak a democratic community and society tends toward crony capitalism, too weak the state and society turns fearful and apathetic. Conversely, too much market and society becomes inequitable, too much community and society becomes static, and too much state and society becomes authoritarian. A balance is essential!

It involves considerable change, and change is risky. But as India develops, not changing is even riskier. We have to keep what is good about our system, of which there is a tremendous amount, even while acting differently where warranted.

The picture of bankers slavering after bonuses soon after they had been rescued by government bailouts was not only outrageous but also pitiable - pitiable because they were clamoring for their primary measure of self-worth and status to be restored

Politicians today vow, “Never again!” But they will naturally focus only on dealing with a few scapegoats, not just because the system is harder to change, but also because if politicians traced the fault lines, they would find a few running through themselves.

firms do not borrow as much to invest when rates are higher and individuals stop buying durable goods against credit and, instead, turn to save. Lower demand growth leads to a better match between demand and supply, and thus lower inflation for the goods being produced.

Do not believe that you can find a universal remedy for evil conditions or immoral practices in effecting a fundamental change in society (as by State Socialism). And do not pin too much faith in legislation. Remedial institutions are apt to fall under control of the enemy and to become instruments of oppression.6

As spontaneous organizations of the distressed emerge, professional politicians and political parties attempt to capture their energy toward their own electoral gain. Franklin Roosevelt, as we have seen, was not averse to using antimarket rhetoric to appeal to the distressed. And once the politicians capture power and there is a drive to legislate, incumbents are not far behind in directing legislations toward their needs. Thus, much as a riot can be exploited by a few to achieve goals that are not the intent of the mob—it is interesting how often riots that are ostensibly labeled “communal” in India turn into a targeted destruction of especially irksome rival businesses owned by the minority community—the political organizations of the distressed can be used by those who have a broader agenda.

A modern, sophisticated financial sector...seeks ways to exploit government decency, whether it is the government's concern about inequality, unemployment, or the stability of the country's banks. The problem stems from the fundamental incompatibility between the goals of capitalism and those of democracy. And yet the two go together, because each of these systems softens the deficiencies of the other.

Our goal should be to make decision makers internalize the full consequences of their decisions, rather than prevent them from making decisions altogether [...] But we tend to reform under the delusion that the regulated institutions and the markets they operate in are static and passive, and that the regulatory environment will not vary with the cycle. Ironically, faith in draconian regulation is strongest at the bottom of the cycle, when there is little need for participants to be regulated. By contrast, the misconception that markets will govern themselves is most widespread at the top of the cycle, at the point of maximum danger to the system. We need to acknowledge these differences and enact cycle-proof regulation, for a regulation set against the cycle will not stand. To have a better chance of creating stability throughout the cycle--of being cycle-proof--new regulations should be comprehensive, nondiscretionary, contingent, and cost-effective.

For example, Shawn Cole, a professor at Harvard Business School, finds that Indian state-owned banks increase their lending to the politically important but relatively poor constituency of farmers by about 5 to 10 percentage points in election years.51 The effect is most pronounced in districts with close elections. The consequences of the lending are greater loan defaults and no measurable increase in agricultural output, which suggest that it really serves as a costly form of income redistribution.

This is a convenient focus, because the villains are easily identified and measures can be taken against malfeasance and neglect. What’s more, it absolves the rest of us of our responsibility for precipitating this crisis. But this is too facile a response.

In most markets, savvy investors can take a contrarian position when prices depart too much from fundamental value. In the housing market (as well as in the market to take firms private), few opportunities exist for investors to take a short position—that is, sell houses they do not have so as to make a killing when prices fall. This typically means that the optimist, who buy housing, tend to have undue influence.14 So house prices, and more generally, asset prices, can rise excessively, and their reacquaintance with reality can be brutal indeed.

Once I saw this trend, the paper quickly wrote itself and was titled “Has Financial Development Made the World Riskier?” As the Wall Street Journal reported in 2009 in an article on my Jackson Hole presentation: Incentives were horribly skewed in the financial sector, with workers reaping rich rewards for making money but being only lightly penalized for losses, Mr. Rajan argued. That encouraged financial firms to invest in complex products, with potentially big payoffs, which could on occasion fail spectacularly. He pointed to “credit default swaps” which act as insurance against bond defaults. He said insurers and others were generating big returns selling these swaps with the appearance of taking on little risk, even though the pain could be immense if defaults actually occurred. Mr. Rajan also argued that because banks were holding a portion of the credit securities they created on their books, if those securities ran into trouble, the banking system itself would be at risk. Banks would lose confidence in one another, he said. “The inter-bank market could freeze up, and one could well have a full-blown financial crisis.” Two years later, that’s essentially what happened.2 Forecasting at that time did not require tremendous prescience: all I did was connect the dots using theoretical frameworks that my colleagues and I had developed. I did not, however, foresee the reaction from the normally polite conference audience. I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions. As I walked away from the podium after being roundly criticized by a number of luminaries (with a few notable exceptions), I felt some unease. It was not caused by the criticism itself, for one develops a thick skin after years of lively debate in faculty seminars: if you took everything the audience said to heart, you would never publish anything. Rather it was because the critics seemed to be ignoring what was going on before their eyes.

By focusing only on jobs and inflation—and, in effect, only on the former— the Fed behaved myopically, indeed politically.

the loan

in a system where relationships are the currency of exchange.

Why are poorer developing countries like China financing the unsustainable consumption of rich countries like the United States?

Daniel Patrick Moynihan once quipped “If you want to build a great city, create a great university and wait 200 years.”11

Two of the pillars I focus on are the usual suspects, the state and markets. Many forests have been consumed by books on the relationship between the two, some favoring the state and others markets.

When the proximate community is dysfunctional, alienated individuals need some other way to channel their need to belong.4 Populist nationalism offers one such appealing vision of a larger purposeful imagined community—whether it is white majoritarianism in Europe and the United States, the Islamic Turkish nationalism of Turkey’s Justice and Development Party, or the Hindu nationalism of India’s Rashtriya Swayamsevak Sangh.

It is populist in that it blames the corrupt elite for the condition of the people. It is nationalist in that it anoints the native-born majority group in the country as the true inheritors of the country’s heritage and wealth. Populist nationalists identify minorities and immigrants—easily identifiable targets and the supposed favorites of the elite establishment—as usurpers, and blame foreign countries for keeping the nation down. These fabricated adversaries are necessary to the populist nationalist agenda, for there is often little else to tie the majority group together.

The first victims of a political search for scapegoats are those who are visible, easily demonized, but powerless to defend themselves. The illegal immigrant or the foreign worker do not vote, but they are essential to the economy—the former because they often do jobs no one else will touch in normal times, and the latter because they are the source of the cheap imports that have raised the standard of living for all, but especially those with low incomes. There has to be a better way . . .”9

West Germany, even after absorbing the migrants fleeing East Germany, had yet more jobs to fill, and in the 1960s signed agreements with Greece, Morocco, Portugal, Spain, Tunisia, Turkey, and Yugoslavia whereby they would send “guest” workers to West Germany, on condition they would eventually return. In 1973, foreign workers were one-eighth of the labor force in Germany. France was not far behind, with 2.3 million foreign workers, or 11 percent of the labor force. Many of these were employed for childcare, as cooks, and as custodians.20 England drew immigrants from the Caribbean and South Asia, including those expelled by Idi Amin from East Africa.

Eurosclerosis was the term German economist Herbert Giersch used to describe Europe’s slow growth and high unemployment, brought about by the postwar accumulation of regulations and social protections.

Three important impediments to a unified European market were a plethora of rules and regulations that differed across countries, impediments to the movement of firms and labor across countries, and currency fluctuation. In a series of negotiated agreements, starting with the Single European Act in 1986, the Maastricht Treaty in 1991, and the Treaty of Amsterdam in 1997, much of Europe agreed to merge into a Union which would implement the four freedoms—the freedom of movement of goods, services, people, and capital across the borders of the signatories. They agreed to a common European citizenship, over and above national citizenship. In addition, a subset of the countries decided to adopt a common currency, the euro.

As wages in domestic currency rose faster in France and Southern Europe compared to Germany, they needed a steady depreciation of their exchange rate in order to retain competitiveness. Corporations disliked having to manage the resulting exchange rate volatility

As economist Alan Blinder has argued, all impersonal services that can be delivered electronically at a distance, with little or no degradation in quality, are potentially vulnerable.16 What will be harder to replace are human creativity, customization, and human empathy.

Even outside the EEC, global trade grew as new multilateral organizations like the General Agreement on Trade and Tariffs pushed for lower import tariffs across the world. The IMF helped, monitoring exchange rates so that no country attempted to get an undue advantage from the increased openness by depreciating its exchange rate and exporting more—the “beggar-thy-neighbor” strategy that was much feared during the Great Depression.

easy credit has been used as a palliative throughout history by governments that are unable to address the deeper anxieties of the middle class directly

These inefficiencies as well as limited competition result in an enormous interest spread (the difference between the bank’s lending rate and its cost of funds): in

The eventual aim was to build a 4,000-acre high-tech park, called Alpha Technopolis, to rival Taiwan’s famous Hsinchu Science-Based Industrial Park. The vision was grand, perhaps overly so.

Apart from the added efficiency, the willingness to be ruthless helps innovation. Past experience and relationships are of little value in driving radical innovation: indeed,

The bottom line was that the scheme was a measured risk, with a probability that the RBI would lose money, a certainty that the bankers would make money, but also a reasonable chance that the country would be significantly better off.

Policy making invariably involves taking measured risks in the face of uncertainty, for one has neither a prior template nor the luxury of indecision. As an aside, that initial

Autobiographies are always written as if the author had it all mapped out with perfect foresight, ignoring the risks and uncertainties at that time. This misleads, as much as those beautiful photographs of a past holiday abstract from the heat, the mosquitoes, and the lack of connectivity. Policy making invariably involves taking measured risks in the face of uncertainty, for one has neither a prior template nor the luxury of indecision.

In the early 1980s, the Reagan administration tasked the National Commission on Excellence in Education to assess the quality of schools. In its widely read report entitled A Nation at Risk, the commission asserted, “If an unfriendly foreign power had attempted to impose on America the mediocre educational performance that exists today, we might well have viewed it as an act of war. As it stands, we have allowed this to happen to ourselves.” It deplored “the rising tide of mediocrity” in schools, as “more and more young people [graduated] from high school ready neither for college nor for work.”27 Much of this is still true today.

Finally, the people in industrial democracies, engaged in their communities and thereby organized socially and politically, enforce the necessary separation between markets and the state through their democratic voice. They do so because they want sufficient political and economic competition that the economy does not descend into authoritarianism or cronyism.

The more explicit and one-off the transaction, the more unrelated and anonymous the parties to the transaction, and the larger the set of participants who can transact with one another, the more the transaction approaches the ideal of a market transaction. The more implicit the terms of the transaction, the more related the parties who transact, the smaller the group that can potentially transact, the less equal the exchange, the broader the range of transactions and the more repetitive transactions are over time between the same parties, the more the transactions approach a relationship. The thicker the web of relationships tying a group of individuals together, the more it is a community. In a sense, the community and the market are two ends of a continuum.

Indeed, as we will see in the book, healthy communities are essential for sustaining vibrant market democracies. This is perhaps why authoritarian movements like fascism and communism try to replace community consciousness with nationalist or proletarian consciousness.

While the populist nationalists raise important questions, the world can ill afford their shortsighted solutions. Populist nationalism will undermine the liberal market democratic system that has brought developed countries the prosperity they enjoy. Within countries, it will anoint some as full citizens and true inheritors of the nation’s patrimony while the rest are relegated to an unequal, second-class status. It risks closing global markets down just when these countries are aging and need both international demand for their products and young skilled immigrants to fill out their declining workforces. It is dangerous because it offers blame and no real solutions, it needs a constant stream of villains to keep its base energized, and it moves the world closer to conflict rather than cooperation on global problems.

The personal checks and balances that most of us bring to bear when we are employed in other activities - we ask ourselves if we are producing a socially useful product - operate less well in finance because, with few exceptions, making money is the Raison d'être (reason for existence) for the financier

the willingness to be ruthless helps innovation.

Past experience and relationships are of little value in driving radical innovation: indeed, because the natural human tendency is to do more of the same and to serve existing clients and needs well, past relationships can be positively detrimental.

It's very hard to make money. I think people don't get that message.

The state, burdened with debt and large entitlement promises made in happier times, is strapped for funds. It is also paralyzed in many countries, with discredited establishment parties at each other’s throat, and challenged by radicals of all kinds. In the meantime, technology rolls on, threatening to automate many more jobs, while not yet producing the growth that will help address society’s difficulties. With society’s values having turned more individualistic, and with little empathy available to paper over differences in already diverse societies, there is none to spare for new immigrants. Nevertheless, population aging is already shrinking labor forces in many countries, so they may well need to encourage immigration. And even as countries turn inwards, bent by the weight of domestic problems, there are very visible signs that climate change, which will require global cooperation to a degree we have never seen before, is upon us. We need to act now, both domestically and internationally, but the will and ability to act is weak.

Dr. Martin Luther King Jr. said, “The arc of the moral universe is long but it bends towards justice.” When seen over short stretches, it seems that history repeats, that racism and militant nationalism erupt periodically in the world to sow hatred and spawn conflict. Yet the society that experiences these movements is not the same, it trends toward being more tolerant, more respectful, and more just. Around that trend line, we do go up and down. We may be down today, and we have a long way to go, but the distance we have come should give us hope. Let us not let the future surprise us. Instead, let us shape it.

a dollar’s worth of physical capital in India would produce 58 times the returns available in the United States. Global financial markets, he argued, could not be so blind as to ignore these enormous differences in returns, even taking into account the greater risk of investing in India.