World is slipping into another Great Depression, new laws are needed- warns Raghuram Rajan

Ace forecaster, the RBI Governor, Raghuram Rajan has warned that too much use of monetary easing will push the world economy into Great Depression of the 1930s variety. He called for international consensus on policy making to escape from the present crisis.

The global economy is “slowly slipping” into Great Depression-like problems of 1930s. He asked central banks to define “rules of the game” to find a solution. The RBI governor was speaking at seminar at London Business School on Thursday.

Indirectly, he criticized the one sided policy stances of advanced central banks without considering its impact on the world economy. Already, the competitive monetary easing by the advanced central banks including the US Federal Reserve has created new varieties of troubles.

“But I do worry that we are slowly slipping into the kind of problems that we had in the thirties in attempts to activate growth. And, I think it’s a problem for the world. It’s not just a problem for the industrial countries or emerging markets, now it’s a broader game,”

Mr Rajan, a former faculty of Chicago University is known for his prophetic warning of the financial crisis in 2006. He was cowed down by US Central banking titans for his assertions during that occassion, but time proved that Mr Rajan was right.

The RBI Governor advocated collaboration in the field of monetary policy execution to find a better solution to the current problems. “We need rules of the game in order to effect a better solution. I think it is time to start debating what should the global rules of the game be on what is allowed in terms of central bank action.”

At the same time he told the Seminar that he is not putting forward any common rules on his own. It is the responsibility of the international policy makers to construct such a policy.

“I am not going to venture a guess as to how we establish new rules of the game. It has to be international discussion, international consensus built over time after much research and action,” 

Earlier this year, the RBI Governor has questioned the quantitative easing exit strategy of the US Federal Reserve. It is difficult to make an exit from the present strategy of zero interest rate according to him.

Proving him correct, now, the Fed is struggling to raise interest rate and is postponing every revisionary decision fearing setbacks domestically and globally.