Raghuram Rajan warns of another global financial crisis......

Reserve Bank of India Governor Raghuram Rajan has warned that the world economy could be heading towards a crash much like the Great Depression of the 1930s as advanced countries in a bid to pull out of the global downturn are working at cross purposes.

He advocated greater coordination between the central banks of these countries so as to avert a replay of the 2008 financial crisis that the collapse of Wall Street firm Lehman Brothers had triggered and from which the global economy is yet to fully recover.

As was the case in the 1930s, the lack of coordination between central banks across the world is producing spillovers that may be difficult to control and could plunge the world’s financial system into another crisis, Dr. Rajan said in an interview to the Central Banking Journal on Wednesday.

Dr. Rajan, a former chief economist of the International Monetary Fund, had famously predicted the 2008 global meltdown.

“We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost,” he told the journal. Whereas countries had previously competed with one another to devalue their currencies to spur economic recovery, the favoured tool now is monetary easing, he said. One symptom of the imbalances in the world’s financial market is the over valuation of the euro in contrast to the Euro zone’s economic standing, he said.

The European Central Bank’s “very, very accommodative stance” is getting blunted by the ultra-loose monetary policies being pursued by other central banks, including the Federal Reserve, the Bank of Japan and the Bank of England.

Dr. Rajan also warned that there could be sudden build ups of risk in the global financial system that might not be possible for economists to predict in time.

He cautioned of a repeat of the major market volatility seen in the aftermath of the Lehman collapse if investors who are chasing higher returns made possible by the loose monetary policies all exit their investments and positions at the same time.

To safeguard against such an eventuality, all central banks must unwind their monetary policies in a coordinated fashion, Dr. Rajan recommended.

All central banks must unwind their monetary policies in a coordinated fashion

— Raghuram Rajan

Governor, RBI

Based on The Hindu

GA Team,

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