'There will be flat growth after rebound'
Raghuram Rajan, the former chief economist of the International Monetary Fund, chaired a committee on financial sector development in India that submitted a slew of bold and innovative proposals in April last year. Mr Rajan, who teaches at University of Chicago’s Booth School of Business, spoke to ET NOW’s senior editor. Excerpts of the interview:
There is considerable thought being spent on the kind of recovery the global economy will show — V-shaped, W-shaped? Do you see any recovery at all?
We’re going to see fairly strong growth over the next couple of quarters, as the rebound from the fall in inventories starts happening, and as the stimulus starts kicking in both the US and Europe. There will be relatively flat growth after the rebound. I’m not sure what shape of letter this is.
Investment banks are making a lot of trading profits, because of the spread between 10-year and two-year bond maturities at a time when most of them have received taxpayers’ bailouts.
Yes, isn’t it wonderful what a zero-interest rate at the short end of the curve does for your profits. I mean, people don’t recognise that this is a big subsidy that banks are getting from all savers. The question is that is the subsidy enough? If I were a regulator, I would have put more effort into making sure that banks don’t pay it out as bonuses. By all means assure your employees that they will be well rewarded, if they stay with you for the longer run, but give them equity positions in the firm.
What do you make of the argument that for the US consumer to do anything much, the housing sector must improve first?
It’s not so much housing to my mind as it’s job losses, and I think that job losses loom particularly large in the US consumers’ mind, because if you lose your job, you lose healthcare, and unemployment benefits don’t last very long. If job losses abate, income is assured and it’s not so much wealth as income, it seems to be that we can expect the US consumer to start spending more.
Right now China is looking to get out of its current mess by blowing some new bubbles. Do you agree with that?
I don’t know if they deliberately want to blow a bubble. They are doing what they know best — to increase investment by state-owned banks. The problem, of course, is that we don’t know if this investment is over-investment. Investing in more of the same, which they already have plenty of, or if this is building up to overcapacity, which will depress prices down the line. China’s greater imperative is to increase household consumption.
Source: Economic Times
There is considerable thought being spent on the kind of recovery the global economy will show — V-shaped, W-shaped? Do you see any recovery at all?
We’re going to see fairly strong growth over the next couple of quarters, as the rebound from the fall in inventories starts happening, and as the stimulus starts kicking in both the US and Europe. There will be relatively flat growth after the rebound. I’m not sure what shape of letter this is.
Investment banks are making a lot of trading profits, because of the spread between 10-year and two-year bond maturities at a time when most of them have received taxpayers’ bailouts.
Yes, isn’t it wonderful what a zero-interest rate at the short end of the curve does for your profits. I mean, people don’t recognise that this is a big subsidy that banks are getting from all savers. The question is that is the subsidy enough? If I were a regulator, I would have put more effort into making sure that banks don’t pay it out as bonuses. By all means assure your employees that they will be well rewarded, if they stay with you for the longer run, but give them equity positions in the firm.
What do you make of the argument that for the US consumer to do anything much, the housing sector must improve first?
It’s not so much housing to my mind as it’s job losses, and I think that job losses loom particularly large in the US consumers’ mind, because if you lose your job, you lose healthcare, and unemployment benefits don’t last very long. If job losses abate, income is assured and it’s not so much wealth as income, it seems to be that we can expect the US consumer to start spending more.
Right now China is looking to get out of its current mess by blowing some new bubbles. Do you agree with that?
I don’t know if they deliberately want to blow a bubble. They are doing what they know best — to increase investment by state-owned banks. The problem, of course, is that we don’t know if this investment is over-investment. Investing in more of the same, which they already have plenty of, or if this is building up to overcapacity, which will depress prices down the line. China’s greater imperative is to increase household consumption.
Source: Economic Times
