Ian Bright from ING has just sent me a review of Raghuram Rajan's Fault Lines which I commissioned for the next issue of The Business Economist. I'll post a link to the journal when it's available, but Ian's summary is:
“
This is a book that is intriguing, depressing and annoying
simultaneously.
“
He also pointed me to a highly critical review of the book by Paul Krugman and Robin Wells, in the New York Review of Books. Their main complaint about Fault Lines is:
“The idea that the government did it—that government-sponsored loans,
government mandates, and explicit or implicit government guarantees led
to irresponsible home purchases—is an article of faith on the political
right. It’s also a central theme, though not the only one, of Raghuram
Rajan’s Fault Lines.”
They disagree, and are not mollified by Rajan's emphasis on the malign role of massive income inequality in the US.
I reviewed it on this blog, and heartily recommend it. I have no problem with the suggestion that government policies distorted lending in the US, and found the book thought-provoking, putting together separate strands of argument in a way that sheds fresh light on the Great Financial Crisis.
Rejoining this, I see David Smith’s “The Age of Instability” has a section (Chapter 5, Subprime Follies) covering the issue of the how important government incentives were in feeding the US housing boom.
Smith rejects the argument of a significant responsibility citing a 2008 speech by Randall Kroszner, a governor of the Federal Reserve, saying loans guaranteed by the Community Reinvestment Act (CRA) accounted for only 6% of higher priced loans. “In other words, the very small share of all higher –priced loan originations that can be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.”
I'll have to look at the book again but I thought Rajan's argument was more about Fannie Mae and Freddie Mac distorting price signals?