Thursday, September 27, 2012

In 2005 Raghuram Rajan Told Bernanke, Geithner, Summers, and Greenspan that We Were Headed for Economic Crisis

I am re-watching Charles Ferguson's Inside Job. It is a fantastic movie, but it is so frustrating to see our failed leaders being rewarded for their incompetence, obstructionism, and failure.

In 2005, Raghuram Rajan, who was then Chief Economist at the IMF, delivered a paper to the central bankers of the world. In attendance were Alan Greenspan, Ben Bernanke, Tim Geithner, and Larry Summers.  He concluded that the financial world was becoming riskier. The paper focused on warped incentive structures which created huge short term profits and cash bonuses, but with no penalties for later losses. He argued that this encouraged bankers to take on huge losses that would potentially bankrupt their own firms or even crash the entire financial system.

Summers criticized Rajan and accused Rajan of being a luddite.

So Summers (and Geithner and Greenspan and Bernanke) had terrible judgment. If the story ended there, it would be an unfortunate one. But the story only really becomes tragedy when we see what happened to those failed thinkers following their pathetic intellectual performance; Obama appointed Geithner Treasury Secretary, kept on Ben Bernanke as Fed Chairman, and appointed Summers to be his Chief Economic Advisor.

These people should have been able to see the coming tsunami on their own. After all, they are the most esteemed and highly regarded economic analysts in this country. But in this case, they were actually given a roadmap. The Chief Economist of the IMF stood in front of them and laid out in detail how the warped incentive structures in our political economy were creating a highly unstable and precarious financial sector that could bring the entire system crashing down. And they still did not act. And our system imploded. And they were all promoted.

They failed as badly as individuals can fail. They were then given the reins to this country and asked to fix it - as if they were fit to do so. That is just unforgivable.

I have to say it again: Charles Ferguson is an American hero. Watch this movie.

Jaime Falcon

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