Fault Lines, Raghuram Rajan, 2011

Posted: September 6th, 2013


Fault Lines, Raghuram Rajan, 2011






Fault Lines, Raghuram Rajan, 2011

CHAPTER FOUR: A Weak Safety Net 83

This chapter begins with the narration about a student, Badri, who came to the United States more than 25 years ago (Rajan, 2010). After obtaining some degrees and a PhD, he found himself employment at in Washington DC making chips for a German –American firm. He was tasked with the responsibility of ensuring that the fabrication line was up to date and functioning well with the aim of reducing the production of defective chips in this production line. His knowledge was well used by the entity for troubleshooting in the production processes to a point of working seventy-hour weeks (Rajan, 2010).

However, the firm later split from a joint venture between the two partners, America and Germans into individual ventures. Badri was able to retain his job and specialized in fabrication of memory card chips leading to the production of smaller memory chips. In addition, the declining production processes also resulted in the reduction of the entity size (Rajan, 2010). The transformation was evident form a large partnership to an eventually smaller farm with increasing debts in an industry, which could be simply termed as capital intensive because of the presence of identical firms with larger capital bases for support in low revenues periods, as the market was usually unpredictable. Following the 2008 financial crisis the organization decided to lay off all of its workers in the United States because of the need to preserve resources. In addition, the organization had already increased its capital bases. Hence, it was under pressure whether to close either the German or the American plant. Badri was laid off and had to survive on meager savings coupled by the costs of living, insurance, and mortgage. In addition, the company was unable to pay for his retirement as it had been declared bankrupt (Rajan, 2010).

According to the author, the United States is under what could be described a weak safety net all due to the asset bubble which instigated the financial crisis of the year 2008 whose effects the world is still reeling from today. A weak safety net is unhealthy for any given economy as evidenced by the American economy where peoples especially the unemployed. Hence it is difficult for individuals to survive this era without jobs coupled by the presence of expensive healthcare instead of provision of adequate and affordable services to such brackets of the economy and enable them get through the difficult times awaiting the economy to get back to normalcy (Rajan, 2010).

From Badri’s situation, it is evident of the effects of the financial crisis of 2008. Firms were forced to forego operations and close their plants due to the lack of adequate funds or entire lack of funds for operations. In addition, this crisis was also attributed due to increased costs of operations for entities coupled by low returns by organizations. Hence, it was difficult to maintain operations without the presence of adequate funds for survival through this period. Only the strongest entities, which had adequate financial reserves and sound financial and economic policies, were bale to withstand the crisis. Some shopped for bargains in the collapsed entities with the aim of acquisition of equipment at low prices for use within their individual companies (Rajan, 2010).

As the title suggests, a safety net is important for low incomes earners as well as for those who have inadequate finances to sustain their survival. This is evidenced in Badri’s situation as he lacks adequate funds for survival given that he has a potential medical condition that could easily turn into diabetes. The lack of affordable insurance could easily lead to diabetes as he lacks cove3r for any ailments for himself and his financially vulnerable family. His ability to access private insurance due to its costs and the criteria for selection of eligible members is an indication of the inequality within the American health system in terms of the ability to access medical insurance. From the author’s narration, it becomes evident of disparities, which are present between those who could be considered as financially well off in comparison to financially vulnerable individuals whose numbers increased due to the loss of employment as specifically the global financial crisis (Rajan, 2010).

In essence, the author provides a vivid elaboration of the lack of a strong safety net to caution vulnerable individuals such as Badri from the tough economic pressures such as expensive health insurance, costly mortgages given the presence of inadequate finances or the utter lack of the same. Furthermore, the lack of  proper safety shows the weaknesses of government in terms of provision of equal services to all. This is evidenced by the vast differences in terms of costs of health insurance, private and organizational or public insurance (Rajan, 2010).

In conclusion, the author seems to emphasis the failure of the government to caution the lower bracket of its citizens form the financial crisis all of which was due to greed for profits by large business, which were considered as too large to fail. In addition, the failure to provide security and a secure safety net by the government eventually led to the generation of disproportionate monetary and fiscal policies, which led to escalation of the financial crisis (Rajan, 2010).

New concepts

The term safety net is used to imply to policies implemented by the government with the aim of cautioning vulnerable and poor people from socioeconomic shocks, as evidenced by the finance crisis of 2008, which led to foreclosure of numerous homes, loss of jobs, expensive healthcare or inaccessible health insurance (Rajan, 2010).

●CHAPTER FIVE: From Bubble to Bubble 101

The author describes Ben Bernanke’s word where he was of the view that “fluctuations of output and inflation had steadily decreased from the 1980’s to the year 2004 (Rajan, 2010). His claims were made on the presumption that the economic policies were sound given the presence of steady growth, lack of high inflation, booms, and busts. Such good economic growth could be attributed to three various factors: the presence of luck given economic setbacks such as increase in oil prices, and wars. Secondly, the rapid evolution of the economic world as industries and corporations become efficient in making production decision due to the ability to obtain and process sales information. The ability of such improvements could be attributed to the ability of countries and firm’s ability to evade recessions as in the past. Thirdly, the improvement educational systems enabled production of good economists with relevant knowledge on the effects of economic policies on the production processes and actual output by economies (Rajan, 2010).

In addition, the Bernanke also considers that current economists were furnished with better skills in the formulation of better monetary policies in comparison to the predecessors who were driven by mere intuition and unfounded economic beliefs on the relationship between monetary polices and economic output. However, his view on economic policies was strained after the 2008 occurrence of the financial crisis. He appealed to congress to rescue the financial markets and entities for man imminent collapse of the economy, which could easily turn, into a depression. Congress was supposed to provide adequate bailout for the entities in financial crisis.

His plea for help is an indication of the flaws, which were present in the monetary policies used by the Federal government (Rajan, 2010).

The author is of the opinion that the financial crisis was due to the Federal Reserve’s mistakes. The initial mistake occurred in the year 2001 when the first recession took place and prompted the Federal Reserve to keep interest rates relatively low (Rajan, 2010). This led to increase in funds in circulation, in the United States, as well as other countries around the world. Given the influence of politics and economics, the Federal Reserve rates were influenced to the favor of some few. The second mistake was the indication of the Federal Reserve encouraged large investments by the low rates and showed indications of supporting these investors in the event of a bubble burst. This was the inception of risk taking given the presence of low interest rates given it was an attempt to create growth in the employment market (Rajan, 2010).

The author uses this chapter to give an implicit indication of the role of the Federal Reserve in the financial crisis of 2008. In addition, the inability of the Federal Reserve was the inception towards the creation of a monster, which eventually grew into a great recession. In essence, the beginning of the financial crisis was set off by the setting of the interest rates. The Federal Reserve is mandated with setting, of which largely through short-term interest rates, which allow flexibility in terms of formulation of these rates as well as monetary policies. The relationship between long-term and short-term interest rates is identical as setting of long-term interest rates as identical to those of short term interest rates. Hence, if long-term interest rates are low then the short term interest rates are expected to be low (Rajan, 2010).

Hence, the Federal Reserve failed in setting adequate or considerable interest for the populace to benefit and the eventual growth of the economy. In addition, the Federal Reserve short term interest rates had a great role to play in the economic activities which led up to the financial crisis of 2008. Short-term interest rates determine economic activity such as actual borrowing by the banks and mortgages (Rajan, 2010). Long-term interest rates, on the other hand, have a role in the determination of the returns by assets such as bonds, equity and houses, which are determined, by the returns accrued by interest rates. Inadequacy of the Federal Reserve is exhibited by the ignorance to heed to the call for adjustments as evidenced by the sharp increases in asset prices, which were driven by non-conventional forces such as increased risk, foreign funds and expansion of credit to unhealthy levels. This should have prompted the increase in rates to curb this unhealthy growth or asset bubble, which eventually burst under the watch of the Federal Reserve due to their failure to act in order to drive growth. Low short-interest rates prompted investors to undertake more risk with the promise of more returns.

In addition, foreign funds flowed into the United States, which is an illustration of the widespread of the financial crisis. Investors from countries like Japan and German sought the prominent mortgage-backed securities, which were on high demand. These fueled the growth of the securities and hunger for the seemingly low risk investments such as mortgages (Rajan, 2010).

In addition, there was also expansion of credit, which also led up to the financial crisis. The rise in asset prices enabled individuals and entities as well the needed collateral to seek loans. In addition, the low-income individuals who sought borrowing and were financed with loans to make payments for their individual needs, as they possessed adequate collateral given the high asset prices. In addition, the same was coupled by the presumption that the foreseeable future would have adequate liquidity hence banks were of the view that long-term financing on risky loans would be “safe” when that was not the case (Rajan, 2010).

It is evident of the effects of monetary policies in the leaning against asset price rises. This is because monetary policies have a significant role in the financial stability of a country and specifically of its economy. In addition, the Federal Reserve could have regulated the markets instead of acting as a spectator while the asset prices increased dramatically. In addition, banks were in search of investors for their loans given the presence of high liquidity within the economy. Hence, lack of action in setting interest rates in relation to the market conditions, which were present-rapid growth in assets prices, easy access to loans, and low inflation-resulted in the eventual near collapse of the economy and specifically the financial markets. Hence, inadequacy in terms of acting by the Federal Reserve was the sole reason for ht bubble and the eventual burst of the bubble (Rajan, 2010).

New concepts

•Philip’s curve-is described as the inverse relationship between the unemployment rate and that of inflation (Rajan, 2010).

•Expectation Hypothesis- is described as expectation that long-term rates within a market are predetermined by the market expectation of the short-term rates added to constant risk premiums (Rajan, 2010).

●CHAPTER SIX: When Money Is the Measure of All Worth 120

The French monarchy was among the first to introduce the use of annuities with the aim of raising funds when it did not have adequate cash to fund operations. This form of investment to the rich nobles was very prominent as it guaranteed individuals consistent receipt of payments until death. People were able to reap benefits from this form of payments if they were able to live for longer periods in comparison to their annuity payments (Rajan, 2010).

However, this form of investment was flawed as it lacked security. This is evidenced by the Geneva bankers who took up thirty young girls and paid annuity for them form the french government. Because of the high returns from the government, more investors were attracted to this form of investment on the presumption of huge earnings. However after the french revolution in 1789, things were disrupted, and payment of the annuities was done with a currency which wads simply termed as undervalued given the economic situation. Hence, this group of bankers was prompted to default given that they were unable to pay back the Swiss investors with undervalued currency given that they had invested in highly valued Swiss currency (Rajan, 2010).

From the historical crisis, there are various lessons, which can be drawn from the situation. The initial lesson is the utter disconnect of society and bakers because of their ability to identify opportunities to make quick and easy money. In addition, it is also evident of the urge to make money by the bakers in comparison to other businesspeople (Rajan, 2010). Furthermore, their knowledge in money matters is an added advantage as they are able to use such information for actual applications in making investments. Hence, from the keen eye of bakers innocent and small ventures can result in great and risky investments given the lack of securities. In addition, the numbers of the bakers ensured that they received compensation and payments from the new government after the revolution. Hence, in relation to the financial crisis, the numbers of the banking community and other investors ensured that they would receive intervention, bailout or funds invested from the government of their investments. In essence, the banking sector actions were as a result of the government’s aim to provide its citizenry with adequate and cheap housing coupled by the presence of foreign demand for high debt securities (Rajan, 2010).

As evidenced by the events of the United States financial markets, slight changes in prices are bound to distort the markets in entirety. In essence, the private sector acted in a predictable, looking for bargains and making quick money provided the signs of making money are favorable, despite the presence of high risk in such an investment. In addition, such deals according to the author could be described as arms-length agreements as they do not have any consideration for the smaller party as they are driven by the need to make profits (Rajan, 2010).

From this chapter, it is evident of the effects of inadequate and proper regulation within any financial system. The financial crisis of 2008 was because of what could be described as cause-effect in terms of the actions by the Federal Reserve and the financial market players. The lack of control and restrictions by the Federal Reserve gave the lenders and indication of the ability to invest in the risky investments given the high returns, which were possible within such investments. In addition, from a moral perspective it becomes evident of the lack of good business practice by the banks and the entire private sector (Rajan, 2010).

In addition, the financial sector illustrated to the world that, without adequate and proper regulation, the sector would head for self-destruction bringing down with the entire economy. International and foreign banks had a great role in the housing market burst and the eventual financial crisis. Foreign central banks were presented with large dollar inflows given the increase in exports to the United States whereas the United States investors sought international markets for better returns on their investments given the low interest rates in the United States (Rajan, 2010).

Brokers also had a significant role to play in the events up to the financial crisis of 2008. Mortgage brokers were responsible for seeking customers for the housing loans and processing of the same. From the acts of the brokers, they were driven by the need to make money via attracting more customers to their “attractive” mortgage payments where they persuaded customers with claims that they would get better value when they enrolled with the various brokers, which was subsequently false after various customers indicated hefty increases in their monthly mortgage payments (Rajan, 2010). This is an indication of the entry of malpractices into the banking sector and housing sector as the brokers held no regard for the customers. In addition, it is evident of lack of regulation in terms of the appropriate conduct of the brokers. In addition, the brokerage firms did not hold their workers liable for selling substandard loans given that they were merely driven by enrollment of new customers without any regard for the quality of the loans (Rajan, 2010).

In conclusion, regulation on brokers would have ensured that they did not engage in bad business practices to their customers. In addition, the erosion of moral conduct in business has a large role to play in the lack of appropriate conduct in the housing market burst.  The mere drive to cash in on the housing market was the drive for the brokers, the banks and the investors given the lack of securities and the favorable exchange rates (Rajan, 2010).

New terms and concepts

• Unintentional guidance-this is guidance towards unwarranted behavior by actions or market forces (Rajan, 2010).

CHAPTER SEVEN: Betting the Bank 134

The author begins with an indication that the qualities of nearly 60% of all mortgages were rated as AAA, which means they were without any doubt of the highest quality. In contrast, only less than all corporate bonds in the markets are usually rated as AAA. Normal relations or correlation of defaults in mortgages is usually extremely low as the presence of unavoidable circumstances such as ill health or loss of jobs. Hence, there were no forecasts in terms of the correlation between the mortgages and default by the homeowners (Rajan, 2010).

In addition, the AAA rated securities were lucrative because they offered higher returns in comparison to the corporate securities. The agencies did not anticipate the correlation between the defaults and mortgages as indicated by their ratings. In addition, the increase in mortgages led to a pool of flooded with identical packages of mortgages. Furthermore, the similarities in terms of the pools of mortgages increased the rate or possibility of default by the customers of the mortgages. This is because any signs of problems in the market would result in a collective pullout by the banks leading to spread of the problems across the country. In addition, the AAA mortgage backed securities were disguised by the presence of high ratings and their high and lucrative returns (Rajan, 2010).

Some entities such as AIG were among the biggest losers in the financial crisis. The entity sold insurance through credit evasion swaps, which were valued on asset-backed securities, which were worth billions of dollars inclusive of AAA rated mortgage-backed securities (Rajan, 2010). However, the values of the asset backed bonds provided by AIG reduced significantly in value as the economy went into a recession. In addition, the defaults on mortgages proved larger than expected given the numbers of banks involved and the numbers of issued mortgages. The events led to losses of billions of dollars as the AIG’s liability in relation to the swaps increased forcing the entity to mark down its portfolio. Due to the increased liabilities, parties who had invested in the firm sought legal remedies to ensure that AIG would honor payment of the swap liabilities. The entity become the largest recipient of bailout funds amounting to more than $150billion dollars after it was unable to repay the liabilities (Rajan, 2010).

From this chapter, it is evident that the banks, which churned out these risky investments to the markets, still held on these risky investments given that these securities had an AAA rating. In essence, these risky investments proved very lucrative especially for the large banks. The risks, which were associated with these ventures, were regarded as unlikely; hence, banks sought after them with ample zeal as they promised high returns given the demand for adequate housing. This is what the author considers as tail risk given the low probability of occurrence of these risks. However, to their dismay the risks led to one of the most devastating financial crises in the United States. In addition, such risks would be evidenced by the countrywide scare within the housing market leading to countrywide defaults on the housing mortgages. Another aspect was the gravity of these risks, which is their eventuality of occurrence, would prove as very costly for investors and the banks in general (Rajan, 2010).

Bankers were forced to take on these kinds of risks due to several factors. Risk-return relationship was one of the most significant factors, which led up to the uptake of these risky investments by the banks on the promise of higher returns. This is because risky investments are lowly priced but tend to produce higher returns. In essence, the onset of these risky investments was marked by high returns as evidenced by AIG Bear Stearns, Citigroup, and Lehman Brothers and other large entities, which realized higher returns before the onset of the recession. These entities were swallowed up by the recession, as they did not have adequate reserves to enable them pay up their liabilities. This is because they thought the risks as having the lowest probability of occurrence (Rajan, 2010).

Furthermore, entities were driven by the need to make profits given that those who object these risky investments were laid off by the top management in order to pave the way for the realization of higher profits through further investments in these highly risky investments. From this chapter, it is clear that the bankers and the investors ignored the growth and occurrence of the tail risks all due to the mere drive to make huge profits. From this chapter, it is evident that top management within the financial institutions lacked good risk management skills and the mitigation for the same. This is because any risks despite its minuteness should be evaluated for its cause-effect relationship on the company (Rajan, 2010).

In conclusion, this is an indication of inadequacy of risk management within these entities. This is because, despite the presence of tail risks, the financial sector used money as the measure of all things. This is evidenced by measure of risks by the returns from making such a risk investment. Despite higher risks, higher returns make an investment in view of the bankers as a healthy investment. In addition, the market’s health was measured in relation to the presence of liquidity. Hence, the high liquidity in the market in the view of the bankers and investors was all due to the notion by these banking organization and investors of the ability of the government to bail them out in the event of defaults in the market. In addition, this notion was due to the ability of government to intervene in such issues. Hence, the government should institute adequate reforms to ensure that financial sector players refrain from taking advantage of investments with tail risks as identified by the author in this chapter (Rajan, 2010).

New terms and concepts

•Alpha-Excess returns in a market for an entity all due to high-risk taking (Rajan, 2010).

• Tail Risks- are risks, which are considered to occur on rare occasions (Rajan, 2010).

• Unintentional guidance-this is guidance towards unwarranted behavior by actions or market forces (Rajan, 2010).

●CHAPTER EIGHT: Reforming Finance 154

The previous chapters have been helpful in the establishment of reasons for the occurrence of the recession and eventual effects of the same. Financial markets around the world have been brought back from the near collapse by their governments through government guarantees, new capital and additional lending. The scenario is unfathomable because banks were able to borrow at almost zero interest rates but charged hefty interests for any borrowing and gave their savers meager returns with consideration of the amounts borrowed.

It is paramount according to the author, for the political class to instigate reform within the financial sector to seal what he had described as the “fault lines” with an aim of averting severe consequences and a reoccurrence of identical events (Rajan, 2010). These reforms have to be actualized despite the presence of doubt within the public domain as they view the system as favoring a few. This according to the author has been fueled by the huge bonus payments issued by these banks given that they are still struggling to meet their expenses and are surviving on bailout funds.

The author is of the view that the private sector, government intervention and Federal inadequacy to give proper regulation to the financial sector had a big role to play in the eventual financial crisis of 2008. In addition, politicians were also to blame for their great support for capitalism, which eventually collapsed. In addition, entities will endure the financial crisis prompting the market players to look for remedies for this situation in other markets. Furthermore, the free-enterprise capitalism described, according to the author, should undergo extensive reform with an aim of preventing recurrence of identical events. Democratization or debt describes the choices individuals were posed in terms of making a financial decision, which had the potency to affect the society at large.

Democracy the need to take up huge loans is a controversial issue because the loans resulted in huge countrywide defaults. Hence, democracy in terms of making a financial decision should be restricted as great freedom in the financial sector was among the reasons individuals were able to take up the great risks without regard for the potential consequences that they would bestow on themselves as well as the society. Thus, it is paramount to establish the best financing activities, which are aimed drawing utmost good within the new reforms with an aim of minimization of risks and the increasing the benefits of such for the majority of the citizens (Rajan, 2010).

Reforms are a priority for the recuperation of the financial markets, the economy and the entities, as well. Competition was among the main aspects, which instigated the Great Depression of the 1930’s (Rajan, 2010). The author states the widespread effects of the financial crisis is attributable to a herd behavior by the banks who took up identical risks resulting in systemic losses after there were defaults. This was further fueled by the competitiveness by the banks who tried to outdo each other by taking up huge loans to compete against each other. From this chapter, it is evident of the need to limit innovation and some elements of competition because of the systemic risk associated with collective competition as evidenced by these banks (Rajan, 2010). It is also paramount for the internal functions of the banks to be analyzed and reformed because they under-priced risk due to breakdown in their internal governance. Another reform that is needed within the market is to do away the notion that an eventual crisis after taking on tail risks by entities would result in government intervention would be important as it would enable the entities to become responsible for their actions. In addition, some entities enjoyed implicit protection from the government, which enabled to conduct their operations without any care in the world for taking huge risks. Thus, it is paramount to ensure that no entity enjoys any kind of protection or favoritism from the government (Rajan, 2010).

New reforms should be cycle proof as stated within this chapter. Hence, they should be “comprehensive, nondiscretionary, contingent, and cost-effective” (Rajan, 2010). This ensures that all the financial institutions are included within this kind of reforms and that none is given preference of favor over the others. In addition, the entities, which took up the risks, which were thought as immaterial or tail risks, but later materialized, should be penalized and made responsible for their actions. Alteration of incentive issued to the top management should be implemented to ensure that the bonuses due to them are spread out over the future years. This ensures that they are able to look at long-term strategies and effects of the decisions to the organization in the future (Rajan, 2010).

In conclusion, it is also paramount to ensure that organizations do not engage in excessive risk taking while still maintaining basic financial freedoms. The financial crisis emanated from the friction between the government interference and the private sector, which could be termed as the location of the “fault lines” (Rajan, 2010). Hence, to tackle this crisis government intervention should be restricted with an aim of withdrawing expectations that, in similar events, the private sector would draw similar intervention in the form of bailouts, guarantees and incentives.

●CHAPTER NINE: Improving Access to Opportunity in America 183

The author argues that not all forms of inequality in terms of incomes or fiancés are harmful to the economy. Disparities in terms of wages are used to indicate to the populace such as the young individuals of the fields in need of their skills and as a means of encouraging hardworking. However, society has a distorted means of achieving high wages, which includes, cheating, theft, birth or luck. The first reform according to the author would be to reform the schools and universities, as well as other tertiary institutions (Rajan, 2010).

Educational reform is paramount as it forms the foundation of intelligence and relation of an individual with the society in the future stages of development. Hence, initial education such as elementary schooling could be reformed to ensure that a child is able to feel comfortable and enjoy the learning processes at an early stage. In addition, education should also include out of school education such as a discipline and determination to excel in life. Hence, good schools articulate self-discipline, urge to learn and good morals

In tertiary institutions are usually considered as a preserve for those who posses adequate finances or come from well of families. In equality in terms of incomes has a great role to play in achievement of tertiary education as some individuals from lower classes find it difficult to continue with tertiary education because of lack of adequate funds for schooling. Human capital according to the author is the greatest driver of growth as the skills acquired are used for creation of new opportunities and overall economic growth. Such after tertiary education can be enhanced through on-the job training. Apprentice ship according to the author enhances the skills acquired through schooling by an individual. Given the high Labour turnover, it is easy for entities in the United States to give skilled and trained individuals the opportunities to actualize their knowledge gained form the tertiary institutions. Such would have a long-term effect on the Labour sector in the United States as it enhances the use of skills for growth in the field of training.

The aim of redistribution of income is to reduce the numbers of people in need of a strong safety income due to poverty, low finances and inadequate education and skills to support themselves. The insufficiency of a good safety net in the United States after the occurrence of the financial crisis led to widespread anxiety leading to the formation of appropriate fiscal and monetary policies. In addition, to create a better safety net, better incomes enable people to save for unforeseeable future circumstances such that they do not have to rely on government intervention. In addition, the author is of the opinion that insurance requires adequate reform. This is because reform would ensure that the country as a whole would benefit from a better and predetermined extension of unemployment insurance (Rajan, 2010).

Healthcare is another field, which needs adequate reform. This is because the populace is full of anxiety about their loss of health insurance for themselves and their families, which were initially provided for by their employers. Healthcare reform should also include organizational reform within the hospitals and sharing of information between the hospitals for better management of the hospitals and their finances. In addition, equality in terms of access to healthcare should be instituted (Rajan, 2010).

Government capacity in terms of expenditure should be restored. Such can be achieved by increasing spending in areas such as Medicare and Medicaid, which have been under-funded as indicated by the increasing liabilities for the government in healthcare. In addition, increasing government expenditures have also been a source of anxiety for the populace because of the view that increased spending would result in higher taxes to cater for such expenses. However, increased taxes is a sure way of restoration of the government coffer preferably if the increase is executed in an equal and proper way.

In essence, from this chapter, for the country to pick itself up again from the effects of the financial crisis from which the economy is still reeling from, reform is inevitable. The consumption in the united sates was driven by the inequalities among the populace all of which is due to the presence of polices which seemed to favor inequality. Despite the negatives posed by the government intervention after the financial crisis, which the private sector expected, it is paramount for the government to intervene further for the adequate recovery of the economy. This is because inaction by the government is detrimental to the economy in comparison to further intervention, which however ha s negative effects. This is because the private sector feeds on the notion provided, that the government would always intervene in the event of any financial crisis as was evidenced by the financial crisis of 2008 (Rajan, 2010).

In conclusion, from this chapter reform comes as a priority for the government for eventual recovery of a slumped economy. In addition, adequate, proper and reformed education sectors would ensure the development of competent and divers human capital in the United States. Skilled labor is a drive of economic growth in any economy. This would ensure that those whoa able to penetrate within the walls of education are able to acquire adequate and relevant employment. This would ensure that those who work hard are bale to accrue greater benefits. Hence, educational institutions should uphold high levels of moral standard sin execution of tasks. The financial crisis could also be attributed to lack or inadequacy of morals in the private sector, which is driven by the mere need to accrue supernormal profits (Rajan, 2010).


Rajan, R. (2010). Fault lines: How hidden fractures still threaten the world economy. Princeton: Princeton University Press.

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