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‘Just lean into the wind,’ Rajan tells hassled world watchdogs

Addressing the Bank of Italy on lessons learned after the economic crisis of 2007-2009, Rajan said that the key to getting the benefits of financial access is to 'always be conservative, taking away the punch (bowl) when the party gets going'.

Looking back at the Great Depression in the United States in the 1930s in an examination of speculative bubbles and their effect on monetary policy, the RBI Governor said that it is clear that greater credit availability tends to make the economy sensitive to shocks.

The rise in asset prices and build-up in associated leverage in America in the lead-up to the bust were so substantial that there were significantly more bank failures in areas with greater credit access, Rajan pointed out.

'What does this mean for prudential risk management? It means it may make sense to lean into the wind,' he said, using a term taken to mean the tightening of monetary conditions when an economy is strong but before evident signs of overheating appear.

'Even if the rise in credit and asset prices is driven by fundamentals, be wary. Be conservative,' he added, calling on 'supervisors to be constantly on the look-out for credit price increase and asset increase'.

Rajan said that both emerging markets and developed countries had been urged time and again to tighten their budgets but 'despite this advice, they do not tighten them enough. It's hard to go against human nature and not revel in the money coming in'.

Asked whether enough financial regulation has been carried out after the latest economic crisis, Rajan said that prolonged regulation change can slow growth and that compared to the 1930s, 'the public wants quicker solutions, quick bailouts'.

However, he observed, it is 'possible we have not seen the end of it. We can see an alertness on the part of the regulators'.

'I don't think the public is satisfied with what has happened so far. I think there is hunger for more,' concluded Rajan.
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