SHRI G.S. INSTITUTE OF TECH.

&
Science INDORE

A
TECHNICAL REPORT
SUBMITTED TO
MECHANICAL DEPARTMENT
ON
THE TOPIC OF

RAGHURAM RAJAN: RBI GOVERNOR

BY
DHARMVEER BARONIYA
ROLL NO.-XXXXXXXXXXX
UNDER THE SUPERVISION OF
Ms. XXXXXXXXXX
ASST. PROFESSOR
ME DEPT. SGSITS INDORE.

RAGHURAM RAJAN: RBI GOVERNOR

SHRI GS INSTITUTE OF TECHNOLOGY & SCIENCE
Mechanical Department
(BATCH: 2014-2018)

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LETTER OF TRANSMITTAL

Preface

Technology

Table of content
Abstract
History
Career
Economical and political view
Awards
Publications
Reserve bank of India
History of RBI
Structure of RBI
The financial system

Financial crisis 2007-2008

Role of economic forecasting
Raghuram rajan warn for another crisis

ABSTRACT

HISTORY
Raghuram Govind Rajan (born 3 February 1963) is the current and the 23rd Governor of the Reserve Bank of
India, having taken charge of India's central banking institution on 4 September 2013, and succeeding Duvvuri
Subbarao. Rajan was chief economic adviser to India's Ministry of Finance during the previous year and chief
economist at the International Monetary Fund from 2003 to 2007. He is on leave of absence as a professor of
finance at The graduate business school at the University of Chicago.
Raghuram G. Rajan was born 1963 in Bhopal, Madhya Pradesh in a Tamil Brahmin Family and his father was a
senior officer in Indian intelligence agency. He did his Schooling from 7th to 12th standard in Delhi Public
School, RK Puram and graduated from The Indian Institute of Technology, Delhi with a bachelor's degree in
electrical engineering in 1985, after which he acquired a Post Graduate Diploma in Business Administration
from the Indian Institute of Management Ahmadabad in 1987.He won Director's Gold Medal in IIT
Delhi and was a Gold medalist at IIM Ahmadabad. He received a Ph.D. In Management from
The MIT Sloan School of Management in 1991 for his thesis titled "Essays on Banking.

CAREER

After graduation, Rajan joined the Booth School of Business at the University of Chicago. He Was the Chief
Economist at the International Monetary Fund (IMF) from October 2003 to December 2006. Dr. Rajans
research interests are in banking, corporate finance, and Economic development, especially the role finance
plays in it. He co-authored Saving Capitalism from the Capitalists with Luigi Zingales in 2003. He wrote Fault
Lines: How Hidden Fractures Still Threaten the World Economy in 2010, for which he was awarded the
Financial Times-Goldman Sachs prize for best business book that same year. Dr. Rajan is a member of the
Group of Thirty. He was the President of the American Finance Association in 2011 and is a member of the
American Academy of Arts and Sciences. In November 2008, Indian Prime Minister Dr. Manmohan Singh
appointed Rajan as an honorary Economic adviser. That same year, a high-level committee on financial reforms,
headed by Rajan, submitted its final report to the Planning Commission
Replacing Kaushik Basu, Rajan was appointed as Chief Economic Adviser to the Government of India on 10
August 2012. He also prepared the Economic Survey for India for the year 2012-13, on 27 February. On August
6, 2013 it was announced that Rajan would take over as the next RBI Governor. He was appointed RBI
Governor for a term of 3 years succeeding D Subbarao whose term ended on 4 September 2013.
In 2014 it was suggested that Rajan could take over from Christine Lagarde as head of the IMF when Lagarde
steps down in 2016.

Economical and political views

In 2005, at a celebration honoring Alan Greenspan, who was about to retire as chairman of the US Federal
Reserve, Rajan delivered a controversial paper that was critical of the financial sector. In that paper, "Has
Financial Development Made the World Riskier?", Rajan "argued that disaster might loom."Rajan argued that
financial sector managers were encouraged to "take risks that generate severe adverse consequences with small
probability but, in return, offer generous compensation the rest of the time. These risks are known as tail risks.
But perhaps the most important concern is whether banks will be able to provide liquidity to financial markets
so that if the tail risk does materialize, financial positions can be unwound and losses allocated so that the
consequences to the realeconomy are minimized."
The response to Rajan's paper at the time was negative. For example, former U.S. Treasury Secretary and former
Harvard President Lawrence Summers called the warnings misguided and Rajan himself a "luddite".However,
following the 2008 economic crisis, Rajan's views came to be seen as prescient; by January 2009, The Wall
Street Journal proclaimed that now, "few are dismissing his ideas." In fact, Rajan was extensively interviewed
on the global crisis for the Academy Award winning documentary film Inside Job. Rajan wrote in May 2012 that
the causes of the ongoing economic crisis in the U.S. and Europe in the 20082012 period were substantially
due to workforce competitiveness issues in the globalization era, which politicians attempted to "paper-over"
with easy credit. He proposed supply-side solutions of a long-term structural or national competitiveness nature:
"The industrial countries should treat the crisis as a wake-up call and move to fix all that has been papered over
in the last few decades... Rather than attempting to return to their
artificially inflated GDP numbers from before the crisis, governments need to address the underlying flaws in
their economies. In the United States, that means educating or retraining the workers who are falling behind,
encouraging entrepreneurship and innovation, and harnessing the power of the financial sector to do good while
preventing it from going off track. In southern Europe, by contrast, it means removing the regulations that
protect firms and workers from competition and shrinking the government's presence in a number of
areas, in the process eliminating unnecessary, unproductive jobs."

During May 2012, Rajan and Paul Krugman expressed alternate views on how to reinvigorate the economies in
the U.S. and Europe, with Krugman mentioning Rajan by name in an opinion editorial. In an article in Foreign
Affairs magazine, Rajan had advocated structural or supply-side reforms to improve competitiveness of the
workforce to better adapt to globalization, while also supporting fiscal austerity measures (e.g., raising taxes and

cutting spending). Rajan conceded that austerity could slow economies in the short-run and cause
significant "pain" for certain constituencies. Krugman rejected this view, advocating instead traditional
Keynesian fiscal stimulus (e.g., spending and investment) and monetary stimulus, arguing the primary factor
slowing the developed economies was a general shortfall in demand across all sectors of the economy, not
structural or supply-side factors that affected particular sectors.This debate occurred against the backdrop of a
significant "austerity vs. stimulus" debate occurring at the time, with some economists arguing one side or the
other or a combination of both strategies.
In a 2014 interview, Rajan said his major targets as governor of the Reserve Bank of India
were to lower inflation, increase savings and deepen financial markets, of which he believed
reducing inflation was the most important. A panel he appointed proposed an inflation target
for India of 6% for January 2016 and 4% (+-2%) thereafter.

AWARDs
In 2003, he won the Fischer Black Prize awarded by the American Finance Association for Contributions to the
theory and practice of finance by an economist under age 40. He was Awarded the fifth Deutsche Bank Prize for
Financial Economics 2013 on 26 September 2013 For his "ground-breaking research work which influenced
financial and macro-economic Policies around the world". He was conferred the Best Central Bank Governor
award for 2014 by Euromoney Magazine. He is conferred with the prestigious Governor of the Year
Award - 2014 from London based financial journal Central Banking.

Publications
Saving Capitalism from the Capitalists, was co-authored with fellow Chicago Booth professor Luigi Zingales
and published in 2004. Fault Lines: How Hidden Fractures Still Threaten the World Economy, published in
2010, has won the Financial Times and Goldman Sachs Business Book of the Year Award for 2010.
He has also published numerous articles in finance and economics journals including the American Economic
Review, Journal of Economic Perspectives, Journal of Political Economy, Journal of Financial Economics,
Journal of Finance and Oxford Review of Economic Policy. The True Lessons of the Recession; The West Cant
Borrow and Spend Its Way to Recovery by Rajan in May/June 2012 Foreign Affairs Several of Dr. Rajan's
opinion editorials are available at: Rajan-Project Syndicate Opinion Editorials

Reserve Bank of India

The Reserve Bank of India is India's Central Banking Institution, which controls the Monetary Policy of the
Indian Rupee. It commenced its operations on 1 April 1935during the British Rule in accordance with the

provisions of the Reserve Bank of India Act,1934.The original share capital was divided
into shares of 100 each fully paid, which were initially owned entirely by private shareholders. Following
Indias independence on 15 - August - 1947, the RBI was nationalized in the year of 1 January1949.
The RBI plays an important part in the Development Strategy of the Government of
India. It is a member bank of the Asian Clearing Union. The general superintendence and direction of the RBI is
entrusted with the21-member Central Board of Directors: the Governor (Dr. Raghuram Rajan), 4 Deputy
Governors, 2 Finance Ministry representatives, 10 government-nominated directors to represent important
elements from India's economy, and 4 directors to represent local boards headquartered at Mumbai, Kolkata,
Chennai and New Delhi. Each of these local boards consists of 5members who represent regional interests, and
the interests of co-operative and indigenous banks.
The bank is also active in promoting financial inclusion policy and is a leading member of the Alliance for
Financial Inclusion (AFI).

HISTORY OF RBI
19351950
The Reserve Bank of India was founded on 1 April 1935 to respond to economic troubles after the First World
War.RBI was conceptualized as per the guidelines, working style and outlook presented by Dr. B. R. Ambedkar
as written in his book The Problem of the Rupee Its origin and its solution. in front of the Hilton Young
Commission. The bank was set up based on their commendations of the 1926 Royal Commission on Indian
Currency and Finance, also known as the HiltonYoung Commission. The original choice for the seal of RBI
was The East India Company Double Mohur, with the sketch of the Lion and Palm Tree. However it was
decided to replace the lion with the tiger, the national animal of India.
The Preamble of the RBI describes its basic functions to regulate the issue of bank notes,
keep reserves to secure monetary stability in India, and generally to operate the currency and credit system in
the best interests of the country. The Central Office of the RBI was established in Calcutta (now Kolkata), but
was moved to Bombay (now Mumbai) in 1937. The RBI also acted as Burma's central bank, except during the
years of the Japanese occupation of Burma (194245), until April 1947, even though Burma seceded from the
Indian Union in 1937. After the Partition of India in 1947, the bank served as the central bank for Pakistan until
June 1948 when the State Bank of Pakistan commenced operations. Though set up as a shareholders bank, the
RBI has-been fully owned by the Government of India since its nationalization in 1949.
19501960

In the 1950s the Indian government, under its first Prime Minister Jawaharlal Nehru, developed a centrally
planned economic policy that focused on the agricultural sector.
The administration nationalized commercial banks and established, based on the Banking Companies Act of
1949 (later called the Banking Regulation Act), a central bank regulation as part of the RBI. Furthermore, the
central bank was ordered to support the economic plan with loans.
19601969
As a result of bank crashes, the RBI was requested to establish and monitor a deposit insurance system. It
should restore the trust in the national bank system and was Initialized on 7 December 1961. The Indian
government found funds to promote the economy and used the slogan "Developing Banking". The government
of India restructured the national bank market and nationalized a lot of institutes. As a result, the RBI had to
play the central part of control and support of this public banking sector.
19691985
In 1969, the Indira Gandhi-headed government nationalized 14 major commercial banks. Upon Gandhi's return
to power in 1980, a further six banks were nationalized. The regulation of the economy and especially the
financial sector was reinforced by the Government of India in the 1970s and 1980s. The central bank became
the central player and increased its policies for a lot of tasks like interests, reserve ratio and visible
deposits.These measures aimed at better economic development and had a huge effect on the company policy of
the institutes. The banks lent money in selected sectors, like agri-business and small trade companies.
The branch was forced to establish two new offices in the country for every newly established office in a town.
The oil crises in 1973 resulted in increasing inflation, and the RBI restricted monetary policy to reduce the
effects.
19851991
A lot of committees analyzed the Indian economy between 1985 and 1991. Their results had an effect on the
RBI. The Board for Industrial and Financial Reconstruction, the Indira Gandhi Institute of Development
Research and the Security & Exchange Board of India investigated the national economy as a whole, and the
security and exchange board proposed better methods for more effective markets and the protection of
investor interests. The Indian financial market was a leading example for so-called "financial repression"
(Mackinnon and Shaw).The Discount and Finance House of India began its operations on the monetary market
in April 1988; the National Housing Bank, founded in July 1988, was forced to invest in the property market
and a new financial law improved the versatility of direct deposit by more security measures and liberalization.
19912000

The national economy came down in July 1991 and the Indian rupee was devalued. The currency lost 18%
relative to the US dollar, and the Narsimham Committee advised restructuring the financial sector by a temporal
reduced reserve ratio as well as the statutory liquidity ratio. New guidelines were published in 1993 to establish
a private banking sector. This turning point should reinforce the market and was often called neoliberal. The
central bank deregulated bank interests and some sectors of the financial market like the trust and property
markets. This first phase was a success and the central government forced a diversity liberalization to diversify
owner structures in
1998.
The National Stock Exchange of India took the trade on in June 1994 and the RBI allowed nationalized banks in
July to interact with the capital market to reinforce their capital base. The central bank founded a subsidiary
companythe Bharatiya Reserve Banknote Mudran Private Limitedin February 1995 to produce banknotes.
Since 2000
The Foreign Exchange Management Act from 1999 came into force in June 2000. It should improve the item in
20042005 (National Electronic Fund Transfer).The Security Printing & Minting Corporation of India Ltd., a
merger of nine institutions, was founded in 2006 and produces banknotes and coins.
The national economy's growth rate came down to 5.8% in the last quarter of 2008 2009 and the central bank
promotes the economic development.

Structure of RBI
Central Board of Directors
The Central Board of Directors is the main committee of the Central Bank. The Government of India appoints
the directors for a 4-year term. The Board consists of a Governor, and not more than 4 Deputy Governors, 4
Directors to represent the regional boards, 2 from the Ministry of Finance and 10 other directors from various
fields. The central bank now wants to create a post of Chief Operating Officer(COO) and reallocate work
between the five of them(4 Deputy Governor and COO).
Governors
The Governor of RBI is Raghuram Rajan. There are 4 Deputy Governors, Deputy Governor H R Khan, Dr Urjit
Patel, R Gandhi and S S MUNDRA. Dr. Urjit Patel became Deputy Governor in January 2013. One of the four
Deputy Governors is traditionally from RBI ranks, and is selected from the Bank's Executive Directors. As for
the rest, one is nominated from among the Chairpersons of Public Sector Bank, and the other is an economist of
repute . It is also often seen that an officer of Indian Administrative Service is appointed Deputy Governor of
RBI and later as the Governor of RBI. The case of Y. Venugopal Reddy, an officer of Indian Administrative
Service batch of 1964 is a noted example for this trend in the RBI.

Supportive bodies
The Reserve Bank of India has four regional representations: North in New Delhi, South in Chennai, East in
Kolkata and West in Mumbai. The representations are formed by five members, appointed for four years by the
central government and servebeside the advice of the Central Board of Directorsas a forum for regional
banks and to deal with delegated tasks from the central board. The institution has 22 regional offices. The Board
of Financial Supervision (BFS), formed in November 1994, serves as a CCBD committee to control the
financial institutions. It has four members, appointed for two years, and takes measures to strength the role of
statutory auditors in the financial sector, external monitoring and internal controlling systems. The Tarapore
committee was set up by the Reserve Bank of India under the chairmanship of former RBI deputy governor
S.S.Tarapore to "lay the road map" to capital account convertibility. The five-member committee recommended
a three-year time frame for complete convertibility by 19992000. On 1 July 2007, in an attempt to enhance the
quality of customer service and strengthen the grievance redressed mechanism, the Reserve Bank of India
created a new customer service department.
Offices and branches
The Reserve Bank of India has four zonal offices. It has 19 regional offices at most state capitals and at a few
major cities in India. Few of them are located in Ahmedabad, Bangalore, Bhopal, Bhubaneswar,Chandigarh,
Chennai, Delhi, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Kolkata, Lucknow, Mumbai, Nagpur, Patna, and
Thiruvananthapuram. It also has 09 sub-offices located in Samana, Dehradun, Gangtok, Kochi, Panaji, Raipur,
Ranchi, Shillong, Shimla , Srinagar and Agartala . The bank has also two training colleges for its officers, viz.
Reserve Bank Staff College at Chennai and College of Agricultural Banking at Pune. There are also four Zonal
Training Centres at Mumbai, Chennai, Kolkata and New Delhi.

the financial system

The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of
banking operations within which the country's banking and financial system functions. Its objectives are to
maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services
to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for
effective addressing of complaints by bank customers. The RBI controls the monetary supply, monitors
economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well
as coins.
Managerial of exchange control

The central bank manages to reach different goals of the Foreign Exchange Management Act, 1999. Objective:
to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange
market in India.
Issuer of currency
The bank issues and exchanges or destroys currency notes and coins that are not fit for circulation. The
objectives are giving the public adequate sups of RBI are to issue banknotes, to maintain the currency and credit
system of the country to utilize it in its best advantage, and to maintain the reserves. RBI maintains the
economic structure of the country so that it can achieve the objective of price stability as well as economic
development, because both objectives are diverse in themselves. For printing of notes, the Security Printing and
Minting Corporation of India Limited (SPMCIL), a wholly owned company of the Government of India, has set
up printing presses at Nashik, Maharashtra and Dewas, Madhya Pradesh. The Bharatiya Reserve Bank Note
Mudran Private Limited (BRBNMPL), a wholly owned subsidiary of the Reserve Bank, also has setup printing
presses at Mysore in Karnataka and Salboni in West Bengal. In all, there are four printing presses. And for
minting of coins, SPMCIL has four mints at Mumbai, Noida (UP), Kolkata and Hyderabad for coin production.
Banker's bank
RBI also works as a central bank where commercial banks are account holders and can deposit money.RBI
maintains banking accounts of all scheduled banks. Commercial banks create credit. It is the duty of the RBI to
control the credit through the CRR, bank rate and open market operations. As banker's bank, the RBI facilitates
the clearing of cheques between the commercial banks and helps inter-bank transfer of funds. It can grant
financial accommodation to schedule banks. It acts as the lender of the last resort by
Providing emergency advances to the banks. It supervises the functioning of the commercial banks and take
action against it if need arises.
Detection of fake currency
In order to curb the fake currency menace, RBI has launched a website to raise awareness among masses about
fake notes in the market.www.paisaboltahai.rbi.org.in provides information about identifying fake currency.
On January 22, 2014; RBI gave a press release stating that after March 31, 2014, it will completely withdraw
from circulation all banknotes issued prior to 2005. From April 1, 2014, the public will be required to approach
banks for exchanging these notes. Banks will provide exchange facility for these notes until further
communication. The Reserve Bank has also clarified that the notes issued before 2005 will continue to be legal
tender. This would mean that banks are required to exchange the notes for their customers as well as for noncustomers. From July 1, 2014, however, to exchange more than 10 pieces of `500 and `1000 notes, noncustomers will have to furnish proof of identity and residence to the bank branch in which she/he wants to

exchange the notes. This move from the Reserve Bank is expected to unearth black money held in cash. As
the new currency notes have added security features, they would help in curbing the menace of fake currency.
Developmental role
The central bank has to perform a wide range of promotional functions to support National objectives and
industries. The RBI faces a lot of inter-sect oral and local Inflation-related problems. Some of these problems
are results of the dominant part of the public sector.
Related functions
The RBI is also a banker to the government and performs merchant banking function for the central and the
state governments. It also acts as their banker. The National Housing Bank (NHB) was established in 1988 to
promote private real estate acquisition. The Institution maintains banking accounts of all scheduled banks, too.
RBI on 7 August 2012 said that Indian banking system is resilient enough to face the stress caused by the
Drought like situation because of poor monsoon this year.
Reserve requirement cash reserve ratio (CRR)
Every commercial bank has to keep certain minimum cash reserves with Reserve Bank of India. Consequent
upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary
stability in the country, RBI can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate
or ceiling rate. Before the enactment of this amendment, in terms of Section 42(1) of the RBI Act, the
Reserve Bank could prescribe CRR for scheduled banks between 5% and 20% of total of their demand and time
liabilities. RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to
effect a decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will make it
mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with
the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money
supply.
Statutory liquidity ratio (SLR)
Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved
securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in
liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact. A
higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved
securities. In well-developed economies, central banks use open market operationsbuying and selling of

eligible securities by central bank in the marketto influence the volume of cash reserves with commercial
banks and thus influence the volume of loans and advances they can make to the commercial and industrial
sectors. In the open money market, government securities are traded at market related rates of interest. The RBI
is resorting more to open market operations in the more recent years. Generally RBI uses three kinds of
selective credit controls:
1. Minimum margins for lending against specific securities.
2. Ceiling on the amounts of credit for certain purposes.
3. Discriminatory rate of interest charged on certain types of advances.
Direct credit controls in India are of three types:
1. Part of the interest rate structure, i.e., on small savings and provident funds, is administratively set.
2. Banks are mandatory required to keep 21.50% of their deposits in the form of government securities.
3. Banks are required to lend to the priority sectors to the extent of 40% of their advances.

Financial crisis of 200708

The financial crisis of 20072008, also known as the Global Financial Crisis and 2008 financial crisis, is
considered bymany economists to have been the worst financial crisis since the Great Depression of the 1930s.
It threatened the total collapse of large financial institutions, which was prevented by the bailout of banks by
national governments, but stock markets still dropped worldwide.

World map showing real GDP growth rates for 2009

In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged
unemployment. The crisis played a significant role in the failure of key businesses, declines in consumer wealth
estimated in trillions of U.S. dollars, and a downturn in economic activity leading to the 20082012 global

recession and contributing to the European sovereign-debt crisis. The active phase of the crisis, which
manifested as a liquidity crisis, can be dated from August 9, 2007, when BNP Paribas terminated withdrawals
from three hedge funds citing "a complete
evaporation of liquidity".The bursting of the U.S. (United States) housing bubble, which peaked in 2006, caused
the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally.The
financial crisis was triggered by a complex interplay of policies that encouraged home ownership, providing
easier access to loans for (lending) borrowers, overvaluation of bundled subprime mortgages based on the
theory that housing prices would continue to escalate, questionable trading practices on behalf of both buyers
and sellers, compensation structures that prioritize short-term deal flow over long-term value creation, and a
lack of adequate capital holdings from banks and insurance companies to back the financial commitments they
were making. Questions regarding bank solvency, declines in credit availability and damaged investor
confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early
2009. Economies worldwide slowed during this period, as credit tightened and international trade declined.
Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and
institutional bailouts. In the U.S., Congress passed the American Recovery and Reinvestment Act of 2009. Many
causes for the financial crisis have been suggested, with varying weight assigned by experts. The U.S. Senate's
LevinCoburn Report concluded that the crisis was the result of "high risk, complex financial products;
undisclosed conflicts of interest; the failure of regulators, the credit rating agencies, and the market itself to rein
in the excesses of Wall Street."The Financial Crisis Inquiry Commission concluded that the financial crisis was
avoidable and was caused by "widespread failures in financial regulation and supervision," "dramatic failures of
corporate governance and risk management at many systemically important financial institutions," "a
combination of excessive borrowing, risky investments, and lack of transparency" by financial institutions, ill
preparation and inconsistent action by government that "added to the uncertainty and panic," a "systemic
breakdown in accountability and ethics," "collapsing mortgage-lending standards and the mortgage
securitization pipeline," deregulation of over-the-counter derivatives, especially credit default swaps, and "the
failures of credit rating agencies" to correctly price risk.The 1999 repeal of the Glass-Steagall Act effectively
removed the separation between investment banks and depository banks in the United States. Critics argued that
credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial
products, and that governments did not adjust their regulatory practices to address 21st-century financial
markets.
Research into the causes of the financial crisis has also focused on the role of interest rate spreads.
In the immediate aftermath of the financial crisis palliative fiscal and monetary policies were adopted to lessen
the shock to the economy. In July 2010, the DoddFrank regulatory reforms were enacted in the U.S. to lessen

the chance of a recurrence.

Role of economic forecasting

The financial crisis was not widely predicted by mainstream economists, who instead spoke of the Great
Moderation. Anumber of heterodox economists predicted the crisis, with varying arguments. Dirk Bezemer in
his research credits(with supporting argument and estimates of timing) 12 economists with predicting the crisis:
Dean Baker (US), WynneGodley (UK), Fred Harrison (UK), Michael Hudson (US), Eric Janszen (US), Steve
Keen (Australia), Jakob Brchner Madsen & Jens Kjaer Srensen (Denmark), Kurt Richebcher (US), Nouriel
Roubini (US), Peter Schiff (US), and Robert Shiller (US).Examples of other experts who gave indications of a
financial crisis have also been given. Not surprisingly, the Austrian economic school regarded the crisis as a
vindication and classic example of a predictable credit-fueled bubble that could not forestall the disregarded but
inevitable effect of an artificial, manufactured laxity in monetary supply, a perspective that even former Fed
Chair Alan Greenspan in Congressional testimony confessed himself forced to return to.
A cover story in BusinessWeek magazine claims that economists mostly failed to predict the worst international
economic crisis since the Great Depression of the 1930s. The Wharton School of the University of
Pennsylvania's online business journal examines why economists failed to predict a major global financial crisis.
[166] Popular articles published in the mass media have led the general public to believe that the majority of
economists have failed in their obligation to predict the financial crisis. For example, an article in the New York
Times informs that economist Nouriel Roubini warned of such crisis as early as September 2006, and the article
goes on to state that the profession of economics is bad at predicting recessions. According to The Guardian,
Roubini was ridiculed for predicting a collapse of the housing market and worldwide recession, while The New
York Times labelled him "Dr. Doom". Shiller, an expert in housing markets, wrote an article a year before the
collapse of Lehman Brothers in which he predicted that a slowing U.S. housing market would cause the housing
bubble to burst, leading to financial collapse. Schiff regularly appeared on television in the years before the
crisis and warned of the impending real estate collapse. Within mainstream financial economics, most believe
that financial crises are simply unpredictable,following Eugene Fama's efficient-market hypothesis and the
related random-walk hypothesis, which state respectively that markets contain all information about possible
future movements, and that the movement of financial prices are random and unpredictable.
Recent research casts doubt on the accuracy of "early warning" systems of potential crises, which must also
predict their timing. Stock trader and financial risk engineer Nassim Nicholas Taleb, author of the 2007 book
The Black Swan, spent years warning against the breakdown of the banking system in particular and the
economy in general owing to their use of bad risk models and reliance on forecasting, and their reliance on bad

models, and framed the problem as part of "robustness and fragility". He also took action against the
establishment view by making a big financial bet on banking stocks and making a fortune from the crisis ("They
didn't listen, so I took their money").
According to David Brooks from the New York Times, "Taleb not only has an explanation for whats
happening, he saw it coming."

RBI governor Raghuram Rajan

warns of another market crash(august-2014)
The RBI governor expressed fears that central banks "may be exhausting room on the financial side and creating
a situation where there will be a discontinuous movement in the financial sector."
Reserve Bank governor Raghuram Rajan has warned that global markets are at the risk of a "crash" due to the
lingering competitive loose monetary policies being followed by the developed economies. Warning that the
current build-up of financial sector imbalances may cause sudden price reversals and sharp spikes in volatility,
Rajan said, "we are taking a greater chance of having another crash at a time when the world is less capable of
bearing the cost".

In an interview to London-based 'Central Banking Journal' on Wednesday, he said, "unfortunately, a number of

macro- economists have not fully learned the lessons of the great financial crisis. They still do not pay enough
attention - en passant - to the financial sector. Financial sector crises are not as predictable. The risks build up
until, wham, it hits you".
The governor expressed fears that central banks "may be exhausting room on the financial side and creating a
situation where there will be a discontinuous movement in the financial sector."
Discounting arguments from a section of economists that asset price hike is not due to credit growth,
Rajan said problems do not appear to be arising from credit growth although this is an issue in some emerging
markets.
"They (global investors) put trades on even though they know what will happen as everyone attempts to exit
positions at the same time, there will be major market volatility," the RBI chief said.
Reiterating his warnings that emerging markets are especially vulnerable to big shifts incapital flows brought
on by unprecedented monetary accommodation in rich nations, Rajan warned, "there will be major market
volatility if such a crash occurs. True, it may not happen if we can find a way to unwind everything steadily. But

it is a big hope and a prayer".

The former IMF chief economist, who famously predicted the 2008 financial meltdown three years before at
an event in US from which the global economy is yet to recover fully, compared the current global markets
to the 1930s which marked the worst recession in the financial history.
Stating that the Great Depression was due to a long period of competitive devaluation of national currencies,
Rajan said, "we are back to the 1930s, in a world of competitive easing. "Back then, it was competitive
devaluation, but competitive easing could lead to competitive devaluation. If there were no consequences, to
competitive easing, fine; but there are consequences." The central banks of the rich nations are now engaged in
ever more accommodative policies, he said, and called for more coordination between the major monetary
authorities. Rajan first made this demand early this year in Sydney during the BRICS finance ministers and
central bankers summit. He repeated the same at the annual summit of the World Bank group in Washington a
few months later. Calling for more policy co-ordination and research into effects of central bank policy
spillover and spill-backs, he said monetary policy changes by the developed world central banks can cause
"substantial levels of uncertainty" at a time that may suit the policy instigator but not be convenient for other
central banks, especially in the emerging markets.

Welcoming the IMF recent statement that it would "examine" monetary policies of major central banks to check
their net benefits, the Governor said this is a major change in the
international organination's stance.
"The sensitivity this kind of discussion raises in central banks will make them think about the value of policies
and whether they are helpful elsewhere."
"I have no doubt that countries will still do what is largely in their interests. But over time we need a little more
effort looking at the global interest. My sense is that once the debate is engaged, we will figure out a way to
move in that direction," the ex-Chicago University professor said.
Expressing concerns about the impact of investors quitting emerging markets all at once after buying heavily
into assets inflated by these loose central bank policies, he said continued failure of leading economies to
comprehend the dangers of financial cycle pose significant risks to the global economy.

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