Yet another doomsayer gets his day in the sun

In 2005, economist Raghuram Rajan cast a jaundiced eye on credit derivatives. Larry Summers said Rajan was "misguided." Who looks silly now?

By Andrew Leonard

Published January 5, 2009 7:41PM (EST)

A quick note while I catch up on two weeks' worth of economic reading: On Friday, the Wall Street Journal's Justin Lahart contributed yet another chapter to the Great Book of Economic Doomsayers Who Were Proved Right by informing us about the unpopular prescience of Raghuram Rajan, who presented a paper in 2005 called "Has Financial Development Made the World Riskier? (Lahart also summarizes his story in a blog post here.)

At the time, Lahart tells us, Rajan, who is now the chief economist of the International Monetary Fund, "came under attack as an antimarket Luddite, wistful for old days of regulation." Among his critics, none other than Lawrence Summers, the former Clinton-era treasury secretary who has been reborn as one of Obama's chief economic advisors.

Rajan looks pretty good now, as do all the gloom-and-doomers. But the man wasn't completely ignored back in the day. Longtime readers of How the World Works may recall that back in April 2006, just a few months after the inception of this blog, I found Rajan's thesis pretty compelling, and well-supported by events that were well under way at that time.

As I wrote back then:

After pondering the astonishing growth, last week, of credit derivatives -- financial instruments designed to slice and dice risk and spread responsibility for it widely throughout the financial community -- we were more than ready for a 43-page analysis of whether innovations in risk management may have increased the chances of financial instability.

Of course, back in April 2006, the answer to that question was still unknown. No longer.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Globalization How The World Works Larry Summers