Raghuram Rajan: belief

Transcript context

…So what do we need to do to address that? I think we need to keep exploring what’s really going on and trying to understand. For example, we’ve seen a big explosion in leveraged loans in recent years. Are they being placed in the right places? When they dry up, will the entities that borrowed that way have enough liquidity? Those are the kinds of questions we’ve got to keep asking. Increasingly, liquidity becomes a source of both leverage and, eventually, credit risk. And that’s, unfortunately, the problem. When liquidity dries up, a lot of people — both the lenders as well as borrowers — are left high and dry, which is why you get pressure on the central banks to come in to the rescue of the system: Infuse the system with liquidity. Start lending to anybody who needs it. And that becomes a problem. You become too reliant on public liquidity. Say I’m just a naïve citizen, maybe even with a left-wing bent, and I say, “Look, why should banks even have off–balance-sheet risk to begin with? Why shouldn’t we force almost everything on the balance sheet? There’s otherwise no way of handling this. We’re completely on the wrong track in terms of bank regulations.” Do you agree or disagree?…

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