India's Rajan Sees Risk of New Crisis on Loose Monetary Policies

Thursday, 07 Aug 2014 11:34 AM

 

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The world is at risk of another financial crisis as monetary stimulus in developed economies encourages investors to take risks and boost asset prices, Reserve Bank of India Governor Raghuram Rajan said in two interviews.

“We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost,” Rajan told the Central Banking Journal.

Global monetary authorities must coordinate more closely and create a safety net to protect developing countries and avoid a “merry-go-round” of perpetual crisis, he told U.K. newspaper The Times.

Rajan has been a vocal critic of developed nations’ monetary policies and their impact on the rest of the world. The former International Monetary Fund chief economist said the world hasn’t learned its lessen from the credit crisis and criticized the use of quantitative easing and other “extreme monetary actions,” according to The Times.

Investors are counting on “easy money” being available for the foreseeable future and thinking they can sell before everyone else does, he was quoted as saying by the Central Banking Journal.

“They put the trades on even though they know what will happen as everyone attempts to exit positions at the same time,” he said. “There will be major market volatility if that occurs.”

Rajan said the problems arising “are not so much from credit growth, which is relatively tepid in the industrial markets and has been much stronger in emerging markets, but from asset prices due to financial risk-taking,” the Journal reported.


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