Fascinating interview from NPR’s Deep Reads with Raghu Rajan, University of Chicago professor, former chief economist for the IMF, and author of Fault Lines: How Hidden Fractures Still Threaten the World Economy, and the cold shoulders he received after predicting the financial crisis in 2005 at a conference where the main objective was to praise Greenspan’s decision to keep interest rates so low for so long.
Bottom line: there has been a stagnation in the wages of a significant part of the U.S. population. And the stagnation has been because we haven’t improved the capabilities of those people.
Where am I going with this? Why has any of this got to do with the credit crisis?
If you look at emerging markets, when they deal with the problem of growing inequality and growing dissatisfaction of the population, the answer typically is: hand out some goodies, hand out some sweets… or… let them eat cake. So that the population feels happy at least for a little while.
Even though it doesn’t do a good job [at solving societal problems], at least the government is giving me this… uh… pension… or… this extra pension. This is what happened in Greece. You kept the government workers happy by giving them more of a pension, 14 months of worth of wages, more holidays, etc.
You don’t pay as much attention to your paycheck when your consumption is keeping up [with the status quo] – and that’s my point!
Over the last 20 to 25 years, the answer has been increasing borrowing. So that you borrow in order to finance a better lifestyle, but in fact, you’re going deeper into debt.
This is precisely what happened in the United States. In my mind, credit became the new way of [income] redistribution.
In other words, most of the last 30 years of “trickle down economics” was more of a “fake it until you make it” mentality. If you can’t make it, we’ll worry about that bridge when the time comes… and boy did it ever in 2008.