Tom talks with University of Chicago finance professor Raghuram Rajan about the fallout from the financial crisis
You were one of the first economists to see the crisis coming. What did you see that others didn't?
Well, this was 2005 and I saw what most others saw, which was a financial sector taking more and more risk. What I did not accept was that the industry had it under control. And I was very worried about the incentive structures.
You mean executive pay?
Yes, and also the fact that you knew if you made mistakes, you could walk across the street to another firm.
That hasn't changed, has it?
It hasn't, and I think that's part of the problem.
Professor Rajan, will we see more equitable income distribution as we come out of the crisis?
Well, I don't think the appetite for redistribution in the U.S. is that strong, in part because I think the rich nowadays are the working rich, rather than the idle rich. What we need to do is increase the capabilities of the workforce that's being left behind. Far too many Americans don't have a high school degree. Far too many stop after getting it and don't get a college degree. If you look at unemployment rates right now for those who have college degrees, it's half that for those without. I think the markets are showing that the U.S. has a mismatch. And if that mismatch grows, you get an underconfident U.S.