In Saving Capitalism from the Capitalists (2003), Raghuram G. Rajan warned how cronyism could wreck competition and hurt prosperity. In Fault Lines (2010), he traced the risk binge that gave America its subprime loan crisis to easy credit used as a sort of balm for inequality, among better-known factors.
Lured home in 2012 from US academia to serve as chief economic advisor, Rajan became governor of the Reserve Bank of India in 2013 and served a three-year term.
Last week, as finance professor at University of Chicago Booth School of Business, Rajan was named by the US Federal Reserve as one of three co-leaders of a task-force that will review its balance sheet policy.
Along with Karen Dynan and Jeremy Stein, economics professors at Harvard with US policy experience, Rajan will examine the “costs, benefits, and institutional implications” of the Fed’s current framework.
Of the five review panels set up by Fed Chair Kevin Warsh, this one may prove the most significant. After all, it goes to the core of the US central bank’s role as the monopoly issuer of what’s effectively a global currency.
The key question is this. In a world of fiat currency ever since the US abandoned the dollar’s gold peg more than half a century ago, can the Fed expect to create money endlessly without putting too much at risk?
Its ‘quantitative easing’ response to successive crises over the past two decades has involved dollar creation by the trillion to buy bonds, with the Fed’s assets and liabilities expanding. Can this act as more than a stopgap? Should it be capped? We await the task-force’s views.