He was once talked about as a possible successor to Christine Lagarde as boss of the International Monetary Fund. Then there were hints he might become governor of the Bank of England.
But Raghuram Rajan says neither job was ever on his radar, despite his position in the front rank of central bankers after a stint running the Reserve Bank of India until 2016.
While the Indian-born economist was seen by some in Whitehall as the type of international figure who could show that post-Brexit Britain remained attractive to the brightest and best, he was always an outside bet for both jobs and remained tied to his academic post at Chicago’s Booth business school. The IMF job went to Kristalina Georgieva, a long-time World Bank staffer, and Andrew Bailey succeeded the Canadian Mark Carney at Threadneedle Street.
In conversation via videolink from his office in Chicago, Rajan gives the impression that a return to the intense political swirl of life as a central banker held little attraction.
“I think being governor is an extremely important position where, in addition to the economics, you have to understand the political undercurrents in a country and be sensitive to them,” he says. “Paradoxically, that is how you retain the independence to act, by giving way on what does not matter while standing firm on what does.
“Not having spent a lot of time in the UK, I didn’t think I had the ability to do the job, especially in the difficult post-Brexit environment.”
Rajan exhibited the same modesty when he was initially reluctant to take on his first big international job at the IMF. In 2003 he became its chief economist, the first to have been born in a developing country.
During his three years at the Washington-based fund, Rajan regularly warned that the financial sector was out of balance and calamity could ensue. Famously, in a speech in 2005, he argued that banks knew little about the risks they were taking. He said: “In the same way as parents are asked: ‘Do you know where your children are?’, bankers nowadays are asked: ‘Do you know where your risks are held?’”
This earned him the first of many rebukes from those at the top of the profession. Larry Summers, the former US Treasury secretary, called him “slightly Luddite” for his refusal to accept the assurances of bank bosses that 21st-century exotic investment strategies were safe.
After Lehman Brothers had gone bust and central banks had initiated a multitrillion-dollar rescue operation based on zero interest rates, Rajan began campaigning against maintaining this level of cheap money, arguing that it would again lead to asset bubbles.
This provoked a row with Nobel prizewinner Paul Krugman, who argued that the post-crash responsibility of central banks was to prop up businesses and protect jobs with low borrowing costs.
In what economists would call a slanging match, Rajan wrote back to Krugman in a New York Times article, saying: “[I] would like to get out of this recession in a way that is sustainable and does not merely pump up growth in the short term only to see it collapse later.”
His award-winning book, Fault Lines, cemented his reputation for guarded optimism. Looking back, Rajan says: “If you take risk and you don’t make losses, you are a lot less careful down the line. In hindsight we bailed out too much, and that has left us less able to deal with further crises further down the line and left the system more tolerant of taking risk because it knows it will be bailed out. And I don’t think that is a good state of affairs.”
Politically, all western governments believe it is naive to say businesses should be allowed to collapse and workers lose their jobs. But then, Rajan asks, what happens when the next crisis hits? “The west has been able to raise more and more debt to bail out the private sector through a sequence of crisis and the question is: ‘At what point will it be too much?’”
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Rajan was born in Bhopal, central India, in 1963 but his father’s work for India’s Intelligence Bureau saw the family move to Indonesia, Sri Lanka, then Belgium, before returning to India in 1974. “I went from Belgium, a first-world country in the 1970s, to India, where milk, rice and sugar were still being rationed. And immediately you ask yourself: why do we have to be so poor? The kids in class were not any smarter in Belgium than in Delhi. And that stuck with me.”
A star pupil, he studied electrical engineering at university in Delhi, then did an MBA at the Indian Institute of Management in Ahmedabad, where he was distracted by his growing interest in the career of the English economist John Maynard Keynes.
“I had read a fair amount of Keynes and I thought, wow, what a guy. A Renaissance man. Has so many interests, but also, in his work, he manages to change the way people think.
“I didn’t know the details of Keynesianism. But when we enter a profession we look for icons and idols we want to be like. And of course we never can, but it is good to go into work with that idea.
“So the notion that through economic thinking you could make a difference – and you could be as interesting as he was – drew me to the profession. It certainly wasn’t the dry econometrics.”
A short spell at Indian multinational Tata as a graduate trainee was cut short when he switched to studying for a PhD at the Massachusetts Institute of Technology. His thesis was titled Essays on Banking, a reflection of his lifelong interest in where and how money travels through the financial system.
He moved to Chicago to take up a post in what many regard as the bastion of neoliberal, anti-Keynesian economic thinking – University of Chicago. Teaching at the offshoot Booth School of Business, where students pay $204,450 to take an MBA, Rajan is regarded as being at the liberal end of the political spectrum.
He argues the left is wrong when it says that markets need to be replaced by the government, “for that will just perpetuate the capture by the elite”, but according to him, conservatives are also wrong when they say the state can be dispensed with. “The absence of government can also be anti-competitive and retard free markets,” he says.
Like those of Keynes, his views have not always been popular. Guarding the independence of India’s central bank was a difficult task during the transfer of power to Narendra Modi’s BJP party. And while Rajan says there was no political interference when he was in post, he declined to apply for a second term, in what the Indian media took as a sign that he was not going to be chosen.
While he stresses that a hard line on monetary policy needs to be accompanied with support for local communities to prevent hardship, his mission appears to be the same as it was when he was invited as a young professor to head the IMF’s economics department – to warn against excessive risk in the financial system.
Ultimately he sees a dash for growth using borrowed money as wrong whether it is a corporation or government. “Riskless capitalism eventually becomes the opposite: it becomes a risk to the entire system.”
CV
Age 60.
Family Married with one daughter and one son.
Education PhD from the Massachusetts Institute of Technology; MBA from the Indian Institute of Management in Ahmedabad; BTech in electrical engineering at the Indian Institute of Technology in Delhi.
Pay Not disclosed, except to say that it is “enough”.
Last holiday A trip to London.
Best advice he’s been given “If you are no longer challenged, move on.”
Biggest career mistake He says there is nothing he loses sleep over.
Word he overuses “Clearly.”
How he relaxes Playing tennis and squash.
