Fault Lines: How Hidden Fractures Still Threaten the World Economy

June 14, 2010

4:30pm - 6:00pm

Santa Monica


Raghuram Rajan



In 2005, Raghuram Rajan was one of the first to publicly predict the global financial crisis three years later. Now he is focused on how to prevent the next one.

"I don't hold bankers innocent, nor do I argue they're victims," economist Raghuram Rajan says. "But I do argue that if you don't look at the incentives that they responded to, you miss the cause of the crisis."

This leading economic thinker visited the Milken Institute to discuss his new book, "Fault Lines: How Hidden Fractures Still Threaten the World Economy," in which he makes his case for what caused the financial crisis and lays out what he sees as the next steps.

The winner of the Fischer Black Prize for the economist under 40 who has made the most significant contributions to the theory and practice of finance, Rajan faults the financial sector and regulators - but also argues that we must examine the social inequalities that caused politicians to foster an explosion of credit, as well as the export-driven countries that count on foreign consumers to overspend.

Incentives to take on risk were out of step with the dangers they posed. Instead of heavy regulation, Rajan says, the incentives for Wall Street need to change so that punishments for losing money are in line with rewards for earning it.

He has suggested that the bonuses that financial workers make during boom times should be kept in escrow for a period and drained if the firm experiences big losses. He has also proposed, with two University of Chicago colleagues, a form of financial-catastrophe insurance that firms would buy into.

The co-author of "Saving Capitalism From the Capitalists," Rajan is a professor of finance at the University of Chicago's Booth School of Business and former chief economist at the International Monetary Fund. Rajan is also an economic adviser to the prime minister of India.