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Inside Job: Raghuram Rajan in Oscar-won movie


:: Scene 1 ::
In 2005, Raghuram Rajan… then the Chief economist of the
International Monetary Fund… delivered a paper at the
Annual Jackson Hole symposium… the most elite banking
conference in the world. Who was in the audience? It was uh…
I guess the central bankers of the world… uh… ranging from
Mr. Greenspan himself, Ben Bernanke, Larry Summers was there, Tim Geithner was there. The title of the paper was essentially: Is Financial Development
Making the World Riskier? And the conclusion was… uhm… it is. Rajan’s paper focused on
incentives structures… that generated huge cash bonuses… based on short-term profits… but which imposed no
penalties for later losses. Rajan argued that these incentives
encouraged bankers to take risks… that might eventually
destroy their own firms… or even the entire financial system. It’s very easy to generate
perfomance by taking on more risk. And so what you need to do is compensate
for risk-adjusted performance… and that’s where all
the bodies are buried. Rajan… you know… hit the nail on the head. What he particularly said was: “You guys have claimed you found a
way to make more profit with less risk, I say you found a way to make
more profit with more risk”… and there’s a big difference. Summers was vocal. He basically thought that I was criticizing
the change in the financial world… and was worried about, you know, regulations
which would reverse this whole change. So essentially he accused
me of being a Luddite. He wanted to make sure that we didn’t
bring in a whole new set of regulations… to constrain the financial
sector at that point. :: Scene 2 ::
Inequality of wealth in the United States… is now higher than in any
other developed country. American families responded
to these changes in two ways: by working longer hours and by going into debt. As the middle class falls
further and further behind, there is a political urge to respond… by making it easier to get credit.

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