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When Raghuram Rajan flagged risks in the financial system and warned of a crisis as IMF’s chief economist in 2005, he was labelled a luddite who opposes new methods. Three years later in 2008, the collapse of Lehman Brothers was followed by one of history’s worst financial crashes that dragged down the global economy.
Now the former Reserve Bank of India Governor has predicted that things will turn gloomier for the banking sector, after the Silicon Valley Bank crash and Credit Suisse rescue.
Pointing at a decade of easy money which has injected too much liquidity into central banks, Rajan warned that it is fuelling fragility in the entire sector.
According to him, a quick reversal of the ultra-accomodative policies deployed in the aftermath of the last financial crisis, has given a free run to banks.
Simply put banks have a lot of liquidity, and want to make more money off it, which lands them in risky positions.
