Rajan did not predict the crisis of 2008 anymore than he predicted the crises of '05, '06, and '07. And he has not stabilized the rupee yet.

There's been a lot of talk lately about how a certain Raghuram Rajan "predicted" in 2005 the crisis of 2008 and how he stabilized the Indian rupee shortly after taking charge as the Governor of the Reserve Bank of India.I don't think he did either. In case of the rupee he has at least not done so yet.

Every Tom, Dick and Harry who gets published in a business newspaper has gone on record saying that Raghuram Rajan predicted the crisis of 2008 in 2005. What he apparently did was to ask a question: "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 real economy are minimized". If this amounts to predicting the crisis, then Rajan has underperformed the average economist,who is expected to predict nine out of five crises. Rajan predicted the crises of 2005 through 2008, but only one of these predictions was validated. One out of four is way less than five out of nine.   

The large appreciation the Rupee enjoyed in the wake of his taking over the governorship also seems orchestrated. For a few days before the event, RBI intervened only intermittently in the forex market, but following Rajan's official takeover of the post, they actively sold dollars. For all we know, should RBI find itself incapable or unwilling to further deteriorate its forex reserves, Rupee could find itself heading back on its depreciation track, to the Yen and beyond,  that it  would find itself on in the absence of the 'managed' part of the managed float that the USD-INR suffers from.    

Been Having Economics/Finance Graduate School Thoughts, But...

In a post extolling the virtues of the Anglo-Saxon economics PhD, 2014 Nobel prize favorite Noah Smith (for his classification of the economics blogosphere trolls; although leaving out a troll type called the Krugmanite from his classification on allegedly ideological grounds stand against him) cites the good job prospects of the economics doctorate holder (hence the picture above) as a major reason to favor such an education, despite its many rumored travails. Agreed. Where there are business schools, there need to be business school professors, some of whom need to have doctorates in economics or finance (except in India, where you can start a business school in your backyard). 

My interest in economics comes from courses I took at IIMC over the two years of my MBA equivalent education there. These were the standard Microeconomics and Macroeconomics courses based on the textbooks linked, and a shorter course on the Indian economy, in the first year (of my studies at IIM, not of the Indian economy). In the second year I followed these up with courses on growth theory, development economics, international economics, economic crises and environmental economics (This does not imply that  growth leads to development leads to internationalization leads to crisis leads to environmental awareness). Alongside these courses, I had also been reading a number of economics blogs ( mainly Krugman, DeLong and Noah Smith). A blog subtitle Noah Smith used (I don't have enough bandwidth to be your exocortex)  accurately sums up the alarming frequency with which I was checking these blogs for updates.

After passing out of the course I was gifted a few idle months before I start working. Apart from wasting time on ignoble time-passes, I have been reading up on several textbooks, which I will shortly list here. These should ideally have made want to join an economics PhD program later, but as of now I feel a bit disappointed by the lack of real world relevance many of these books seem to suffer from. My rather lazy modus operandi is to read them from cover to cover, highlighting interesting/important points as I go along. These are the books I have read this summer:

Update: This post has been lying around in draft status for a while so publishing it in its present in complete format. I have yet to write reviews of some other books I read up the same summer, but that may not be happening.

Lectures on Macroeconomics (Blanchard and Fisher) 

Came recommended for the economic growth course. Sweeping presentation of benchmark models in various fields of modern macroeconomics of the neo-keynesian kind (mostly), with few exceptions such as financial economics and new trade theory. After a proper study of this I feel I will be able to claim a certain literacy in the methods of modern macroeconomics. However, I am disappointed by the lack of significant real world implications of the models discussed. 

The authors had already forewarned in the preface that the field was yet young and may not answer real world questions satisfactorily.The sense I got is that the field is by and large existing in an ivory tower where it has distanced itself from the need to have any bench-marking to the real world, and part of the reason is the obsession with mathematical complexity, especially of the optimization variety. However, this complexity then goes on to inhibit greater generalizations of the models, so they have to be analyzed under highly restrictive assumptions. This is a neither here nor there scenario that doesn't seem meaningful to contribute to.

Paul Krugman says something in this vein as well: What would truly non-neoclassical economics look like? It would involve rejecting both the simplification of maximizing behavior, going for full behavioral, and rejecting the simplification of equilibrium, going for a dynamic story with no end state.

That seems to be the extreme to which a person who studies the book should aspire to rise, but currently, using highly restrictive assumptions, most often that of the representative agent, are the common approach. Until a significantly higher stage is reached, I don't think such analyses will provide too much intellectual excitement to me.

To be continued when I get a long enough sojourn from work.