Odd Lots - Raghuram Rajan on Surging Gold and Growing Risks to Financial Stability

Episode Date: October 20, 2025

Gold has been surging. Risky assets (with a few minor hiccups) have also been surging. And yet, central bankers (most notably the Fed) are in rate cutting mode. Why is this? And what kind of risks are being conjured up? On this episode of the podcast, we speak with Raghuram Rajan, a professor at the Booth School of Business at the University of Chicago, as well as the former Governor of the Reserve Bank of India. Rajan famously was one of the first to raise alarms prior to the Great Financial Crisis in 2008. We discuss why financial markets are doing what they're doing and whether central bankers are sufficiently attuned to the growing risks. Read more:Gold Holds Drop as Traders Focus on US-China Trade, Credit WoesAI Stocks Are in a Bubble, Most Investors Say in BofA Survey Only Bloomberg - Business News, Stock Markets, Finance, Breaking & World News subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at  bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wicenthal. And I'm Tracy Alloway. Today, listeners get a special live episode of the podcast that we recorded in Washington, D.C. at the annual meeting for the Institute for International Finance. That's right.

We spoke with Ragaram Rajan. He is a professor at the University of Chicago Booth School of Business. And of course, the former head of India's Center. central bank. And he is exactly the person you want to talk to when everyone seems to be talking about risks in the market. That's right. Of course, and we bring it up in the conversation. He was sort of famous for being one of the early people to warn in, I guess, 2005 about brewing risks to the financial system. So we talked about what's behind the surge in gold, what's going on with central banks and how seriously they're taking inflation, speculative fervor and frenzy

in the market, all of the things that are relevant right now. So take a listen. Let's get started. Why is gold up so much? Let's start with the really important question. What is your story or theory behind this seemingly nonstop demand for gold right now? Well, there's no single story, right? It's a number of stories.

First, it started taking off, what, 2023? Clearly, there is an element of geopolitical risk. Many central banks looking at the militarization or the weaponization of payments are basically saying, Do I want all my reserves in developed country currencies? Do I want something which I control directly? So a movement to gold for that reason may have started initially a lot of central banks moving to more gold. But there are other reasons. I mean, what's the safe asset today?

If you look around the world, certainly if you look at Japan, you know, huge amount of debt, probably higher inflation than in the past. and interest rates really low? Is that a place you want to put a lot of money in? The euro area, well, it's always been a question of whether it's a cohesive unit, who's going to bail the system out when there's a problem? And, of course, the United States running large fiscal deficits, you know, until the eye can see. So, you know, a lot more questions about safe assets today, and that's the second feature. Third, of course, interest rates coming down.

Gold is easier to hold at that point. A bunch of reasons why this is happening. I would say at this point also that there is a fair amount of froth. So you can't completely discount the fact that gold prices are probably moving along with the froth as everything else. Was this something that was on your radar when you were at the RBI, head of the RBI? How did you think about reserve diversification then? Well, yes, you do want to diversify your holdings.

the worry about your reserve assets in developed countries being sequestered because of an angry president or prime minister wasn't as big a concern. But there was definitely a view that you needed some diversification. And, you know, once you get beyond the big reserve currencies, you know, it's harder to deal with the smaller countries. Gold is not liquid. That is a problem. It sits on your balance sheet, but if you want to transform it into something, it's sitting in your walls. convinced the others that it's a lot of countries have their gold in New York or in London. There it's a question of moving from one wall to another. But if it's in your home country, it's harder. You need to rent a 747 to take it elsewhere. Yeah, I was talking to someone last night

who pointed this out, you know, there's this for a long time, the price of gold could sort of be modeled or linked to real rates in some way. And there was a sort of nice, stable relationship. And they pointed out, you know, if you really look at when the divergence occurred, it's not long after Russia's invasion of Ukraine and, of course, the seizure of Russian assets, which fits into what you're talking about, which is that if you are, you know, a reserve manager at a bank or whatever, did that wake people up to the possibility that your fiat currency that is in some foreign central bank or some foreign entity could just disappear one day in a way that your own custodied gold cannot. I think it did. I think that's a strong reason. You see the movement starting in 22, 23. It starts picking up more strongly. But it's also the willingness to weaponize a lot of stuff. As you know, a number of countries are trying to build alternatives to Swift because Swift can be weaponized. Now, these need not be your traditional sort of quote unquote rogue countries, which, you know, have been on the list of. of sanctions for a long time. This could be any country which fears political change. I mean, if Canada can turn out to be antagonistic to a close neighbor, what about a country

5,000 miles away? So trust has broken down in the system. And that's part of the reason why people are trying to build alternatives which don't make them dependent. Payments are so crucial. You don't want to be dependent on any one country that can change the nature of payments. So it feels like we're at the

this really weird juncture where there's a lot of distrust in the system, a lot of unpredictability around the behavior of the United States in particular. And yet the U.S. dollar and U.S. treasuries form the basis of the global financial system. How do you see that evolving over time, given some of these concerns, given concerted efforts to, for instance, create a new SWIFT. Well, I think part of the reason is the Tina Factor. There is no alternative, right? The U.S. market is still the deepest market in the world, treasury markets and so on. It is liquid. Many institutions operate here. And yeah, people still trust the rule of law prevailing in the U.S. Potentially, the fact that there's been so much agonizing about the seizure of Russian reserves

is actually a good thing because it says that it doesn't happen on a whim that that countries actually think about it and then are finding ways that sort of look legal to actually sequester them. And so I think that's to the good. Of course, the fact that it's even questioned is what a number of other countries worry about that we may not have control of those reserves. Speaking of dollar alternatives, or there is no alternative, okay, we talk about gold, President Trump perceives the existence of this entity called the bricks to be an assault on the U.S. dollar. You know, I always think it's pretty wild that there is this entity that exists because Jim O'Neill thought it was a good acronym over 20 years ago.

These were going to be growth markets. But, like, how seriously should we take this entity? What does it represent to you? Is there a germ of something that could represent, build something that is an alternative to the dollar? How should we think about this entity? Well, Jim O'Neill thought of it initially as this fast-growing group of countries. And it has, I mean, there's been differences across this group.

China and India have grown much faster than the rest. of course, China has been spectacular in the early years of the Briggs nomenclature. Is there a cohesive structure there on some issues where, for example, it's sort of the emerging market collective against the industrial country collective issues such as green transition, who has responsibility? But again, there's a lot of divergence. China has much more of an industrial base than, say, India. if you look at who emits most in the world, it's China.

So even on the green issue, there is a divergence in opinion. I think with the addition to Bricks of all these countries like Iran and so on, it becomes much less cohesive and seems much more like a anti-West kind of structure, which certainly India doesn't subscribe to, which Brazil probably doesn't subscribe to, again, to the extent that some of the others. And of course, within the bricks, there are antagonisms, right? India and China for the border conflict in 2020. So I think the sense that it is a cohesive group, it's a talking place. The sense that they will come together with a common currency, I mean, forget about it.

That's not going to happen. May they build up a payment system which is different? Yeah, I mean, I'm happy as a country to be part of five different payment systems. Gives me diversification. It's somebody tries to put the squeeze on me, I move to a different payment system. But does that mean I'm going to go towards a currency? Probably not. So we started out talking about gold, which seems to reach a record high every day now. Stocks are also still pretty high. I know we had something of a correction recently. For like five minutes. Yeah, for five minutes. In general, things seem to be going relatively well for equities as well, which is a very strange situation where you have the safe haven asset going up along with stocks still quite high.

I know you famously presented a paper at the 2005 Jackson Hole where you talked about financial stability and risks that you saw in the system. And I think Alan Greenspan wasn't very nice about it at the time and probably lived on to regret that. But when you look at the market landscape now, what risks do you see? Please say something equivalently historic on this stage for our podcast. That's all we're asking. Let me say something historic in the sense of talking about history.

Okay. Look at every financial crisis in the last hundred years, and there are a couple of papers that have been written recently about it. If you look at the monetary policy settings before those crises, they always have a U-shape. Easy times. That's when the risks build up, tightening. That's when it starts crumbling and it falls apart, okay?

Whether that use shape is policy rates or whether it's some kind of deviation from neutral, it's always accommodative followed by tightening. That's when the financial collapse occurs. And the more the credit in the easy phase, the worse it is. That's what's been established post-Global financial crisis. And you can see that shape before the global financial crisis. And including in Europe where there were countries at the periphery, where this shape was more pronounced because they had higher inflation,

so the monetary policy setting was too loose for them, and countries at the core where it was much more equal, and so Germany, France didn't have the kind of financial crisis, except through their lending to the periphery countries, as did the periphery countries. So what does that tell us? It tells us be really careful when you have a long period of easing, followed by a tightening.

Now, immediate reaction, well, we had a tightening. happened. Well, we had a tightening after an enormous amount of spending by governments which essentially took the debt up from the private sector. Banks got bailout. Remember the provisioned at the beginning of the pandemic? Nothing actually happened because things like the paycheck production program gave them the money back. So we had a lot of support from the public sector to the private sector. And that's why when the tightening happened, balance sheets weren't really adversely affected. But credit keeps growing, not in the households, but in the corporate sector. So we haven't had a really strong tightening, except remember in the tightening phase, we had Silicon Valley Bank,

which was, people forget, the largest crisis in terms of nominal losses in the U.S. banking system. And yet 22 bank runs at the same time as Silicon Valley Bank happened, enormous intervention by the Fed to support the banking. system, including by pushing out reserves and back into the system and giving people an easy way to borrow against full nominal value of their liabilities. We forget that that was a big crisis which we avoided because of intervention. Going forward, you have a lot of froth in the system. And now we're talking about cutting rates. But we're talking about cutting rates when inflation has been high for a reasonable amount of time. It's plateaued at three. It's still nowhere near two. saying, is there a new sort of target, three, not two?

And you're seeing that demand is still strong, whether it comes from resilient households, whether it comes from the AI boom, whether it comes from government spending, even while supply in the U.S. is more constrained because of the immigration constraint that is being put. So strong demand, weaker supply, is that really conducive to disinflation?

Maybe not. And so what's the bottom line? you have a lot of froth in anticipation of further cuts, and you have some risks that, in fact, it may go the other way. And the system, in many ways, whether it's stocks, whether it's leverage in some parts of the system, as we've seen, is priced for perfection. You hear from people at the Fed and other officials

and, like, oh, policy has been modestly restrictive, somewhat restrictive. But as you just described, inflation is not close to 2%. It's closer to 3%. obviously risky assets are surging. Even with some of the little like credit cockroaches, I think Jimmy Diamond used that term, like actually spreads have totally been fine. Do you think that term restrictive is at all appropriate to describe the current stance of monetary policy in the U.S.? So restrictive is always in famous central bank speak relative to an R-star. And nobody knows what R-star is, what the equilibrium rate is. But if you think there's strong

demand and somewhat more constrained supply, our star is higher than it was historically. But look at another indicator. And I know people sort of complain about financial conditions indices and say, well, what does it really mean? But look at the Chicago financial conditions index. You know, almost right from the time of the Fed raising interest rates, it has actually been coming down, becoming more supportive rather than less. So whatever the Fed is saying, about restrictive. Yes, there's one part where it's really restrictive. Nobody's getting a mortgage today at these rates. That's an exaggeration. But you're seeing the mortgage market is tight. So household borrowing against houses is dead in the water. But everywhere else, look at

credit spreads. Yeah. They're really at historic lows. And that's suggesting that we have a funny financial market, which is actually quite frothy in many places. So I worry about that. And I worry because central banks sort of seem to say somebody else is going to take care of financial stability. We're about inflation versus growth. And, you know, when you talk about all the discussion about Fed policy, there's not a lot of talk about where the financial markets are. And what I told you about the U-Shap suggests we should be paying more attention because this is the time the kind of vulnerabilities get created in the frenzy. Maybe it is AI investment moving from being financed internally to being by credit. Maybe it is some of the weak credit standards that are billing first brands as an

example. Froth is when the problems are built, and we should keep that in mind. You know, you mentioned the investment boom that we're seeing, and it does feel like AI-related companies are spending enormous amounts of money arranging some very interesting, somewhat circular financing deals to each other. With your central banker hat on, How should a central bank deal with inflationary pressures that come from an investment boom versus, for instance, some other type of boom in the system? Well, this is the great Austrian dilemma, right? What the Austrian economists used to call malinvestment.

Is this malinvestment or is this good investment? Almost surely, if you draw the parallel with, say, the telecom investment during the dot-com boom, some of this infrastructure will be used. Eventually, the AI will get good enough for many companies to use it and improve productivity. I mean, we all know spectacular examples of AI in our work, and Bloomberg sort of summarizes a whole lot of stuff using AI. My turgid writing becomes much more accessible when I say, you know, make this engaging, I tell Chad GPT. So there are ways that But we all think the promise of AI will eventually show up. But it's that transition from when the infrastructure is created to when people use it and

pay for it, which is the big issue, right? Because these are investments which are large, which have high depreciation rates at this point. And so they need the revenues in order to make them justify the investment costs. And there I worry a lot more. we've seen all these surveys saying companies, yeah, they have their toe in the water, but are they rolling out in a big way? Yeah, Goldman Sachs will because it has really smart programmers and people capable of doing that.

The average company on the street is probably not that advanced. And maybe it's not as much into services, et cetera, that it can employ it in such a big way. It will come. But the pace is really important. And the Austrians always talked about the fact that the pace is critical. If the pace is much longer down the line, at some point the markets realize that the net present value of these investments are not that high, especially if you add in that little piece about interest rates being higher than being lower, R-star being higher, long rates, therefore, being higher. And that would make the present value of the revenues lower than we anticipate. So I do worry that this investment is something that may prove a little more elusive the returns.

What does the central bank do about it? I think it cautions. I think it tells the supervisors look for this kind of lending, make sure that it is reasonable, but it has to have an eye on the credit expansion that is taking place and say, well, that's part of my calculation as to whether we're really in a boom time. whether I need to cut rates further. So I would factor that into my rate decision, and I presume that's part of what they're looking at. You know, we started this conversation, I would talk a little bit about geopolitics, the seizure of Russian gold and other sort of big, deep issues related to trust.

Something I'm very interested is not geopolitics, but politics. I mean, we're in D.C. right now where the government is currently shut down with no imminent prospect, as far as anyone knows, of reopening. There are similar evident dysfunctiones elsewhere in the rich world. The complete collapse of the two-party system in the UK, for example, seems to be getting a lot of attention. When you think about, you know, this sort of ability of central banks to do their job, to address concerns, how worried are you about the political environment that buttresses the independence of the autonomy of these institutions? It's a great question. You know, the view about what distinguished developed countries

from emerging markets and developing countries was always, it's the institutions. And Trio won the Nobel Prize for it last year. The developed countries have strong institutions. The developing and emerging markets don't have strong institutions. So what's the prescription for development? Build the institutions.

It's that simple. Just build good institutions. What's the challenge? It didn't work. You put in inflation targeting regimes in other countries. Maybe politicians got into the act, pushed the central bank, didn't work as well. What worked was getting the politics right. Consensus amongst the parties in a country that this was the way to develop.

Let's not go to the extremes on spending. Let us have a much more modest spending program. Let's bring inflation in check. Let's give the central bank itself. independence. When the politics became more conducive to macroeconomic stability, the institutions naturally developed. I would argue that in Brazil, it was a combination of the parties deciding that we don't want to go the old way. So Cardozo is the guy who brought in inflation targeting, but it was Lula who appointed governors who would continue that rather than reversing it as soon as he

came into part. That combination, right-left combination, which built into the consensus, gave Brazil a strong institution, the central bank, which actually carries it through and has carried it through. We're not seeing the kind of inflation in Brazil that we're seeing in Argentina. Brazil broke from the back. And I think you can see this again and again in many emerging markets. Why am I telling the story? Because our confidence in industrial country institutions should be directly proportional to our confidence in the politics being consensual. And that consensus, as you say, has broken down in part because parties of the extreme left and the extreme right are looking more appealing than parties at the center because they

offer unorthodox solutions. Solutions we've tried before in history often and not work, but it's time to try them again because we haven't seen them not work recently. Let's try the old experiment again, shut down the economy. me and see what happens. So my sense is that we blame it on the institutions, not being strong enough. These institutions are as strong as we can make them, but it's the politics that has to support them. When the central bank is assaulted at every corner by the administration, there is no set of structures which can protect it. And almost surely it will bend. It is natural. You know, you protect the

tenure of the central bank governor or the chairman, that's not going to help if you can affect its finances, you can affect who's appointed next. There's so many levers the government has. So institutions cannot be made fully independent. They will always bend. And that's what we're saying. It's the politics that has changed, not so much the institution. Is there anything a central bank can do to, if not be fully independent, at least protect its ability to say no? Well, I think ultimately it comes down to the integrity and the backbone of the people there. They can try and be as persuasive as they can. But there's some battles they really have to fight and say, look, I've tried. You've said no, no, no. It's my turn to say no.

And that can take you a little way because you have some institutional protection, not a whole lot. I think Chair Powell has, in this country, has done as good a job as could be expected from anyone. He's had the integrity, had the backbone, has ignored all the slights and the arrows that have come his way. But there's only so much he can do. Eventually the term expires. One of his term expires, but he also has to keep an eye. Central banks have to play out the politics also without being elected politicians. What would be harmful for the Fed is if it becomes obvious that the Fed sort of created a recession.

They're being set up in a sense to be the four guys if there is a recession. And that is why you bend because you don't want to be the guys who held rates so high that there are. But that comes at the cost of potentially sort of weighing the risks on both sides and maybe cutting when in the inflation is still a much bigger issue. In other times, you might be more resistant to these cuts. I was going to ask, is the fact that, again, the Fed would never say that, oh, we're comfortable at 2.5. They're never going to officially say that. But de facto, you look at that line and it came down quite a bit from its peak in 2022, whenever that was.

So they made a lot of progress, but it sort of stalled out. That gap between where they are now and what the official goal is, to some extent, is that itself an indication of the political change that that extra mile or whatever it is is not worth it in this environment? First, I agree with you. They will never say that extra mile is not worth it. And I don't think it's in front and center of their mind. They think that I do think they believe that the risks are more towards economic weakness.

Now, of course, we don't know whether the weak jobs numbers are because of demand or supply. Sure. And that's still an open question. When we get the jobs data, et cetera, we're going to look at it more closely. Companies are not firing. They're also not hiring. And maybe they don't at this point, productivity gains, et cetera. So it's still an open question whether there's economic weakness.

I think the Fed is putting some weight on that. Now, what I'm arguing is maybe they're putting more weight on that because back of their mind, it's also this view that they don't want the Fed to be blamed for a recession. this is the wrong time to have a Fed-created recession from the larger institutional perspective. Again, there's not front of mind. This is back of mind, and you would keep that in mind. So, yeah, it's not that they say 3% is okay. They would love to go towards two.

It's just which risk is bigger right now. When you were at the RBI and you had to make the decision, basically, are you going to try to get control of inflation, or are you going to focus on short-term growth at that time? What were the sort of political considerations going through your mind? Well, they made very clear to you what the political considerations are. The politicians always want lower interest rates. They hear it from the industrialists.

They hear it from every constituency. And while I was at the RBI, we didn't have an inflation committee, which is what I pushed and we got that over my term. but I was always making the decision. The problem when you're making the decision is that there's a single point of contact for people to pressure. And so I heard it from a lot of politicians.

This is what we like. What you have to tell them is, look, yeah, that's what you like, but you also like low inflation. And in order to get low inflation, I have to be more restrictive. And as soon as I can, I will reduce rates. But believe me, at this point, it's not in your interest for me to do it.

And they respect that when you explain it to them very carefully and you say, look, they will push you. But if you succumb, you bear the entire blame because they will say, you know, he could have said no. And of course, what would happen if he said no, we don't know. But you are meant to be their protection. And it's important you recognize that and have the backmoan to stand up. Now, fortunately, and you had this very long title for me initially, I had a tenured position in academia. So I could say no and, you know, lose my job. I go back to a position in academia.

Many civil servants don't have that luxury. But that gives you back more. The fact that you can say no is very, very important. And, you know, Powell has that. He doesn't need the job. He doesn't need the money. He obviously cares about doing a good job for the country. and he cares about his legacy.

So I think it's good to be that way. Less good if you're a careerist and appointed precisely because you've said yes. I have an Indian economy-related question that's a little bit sideways from central banking and macro. There is a lot of fantasizing or dreaming or hoping that India could be a manufacturing center

that's sort of another gravitational pole that's separate from China. I'm sure Apple, they're doing a lot. but they would love to have more of their sort of advanced production in India. There's moving some final assembly. What are the main constraints? How realistic in your view is that prospect, that there could be a meaningful shift of supply chains to India outside of China?

India has made changes over the last decade or so in terms of infrastructure. It actually started before the global financial crisis, the global financial crisis interrupted that process. But if you look at India infrastructure today, it's come a long way from the Indian infrastructure of old. Look at the Indian airports. I mean, they're as good as the best in the world, certainly in the major cities, but across the railways improving their ability freight. There are some private sector ports which have the efficiency that ports elsewhere and the world have. So infrastructure, great job, makes it much easier.

Still, some issues to be ironed out. Power is an issue that needs to be more fixing. But green power is a big, big growth area, and that contributes a lot to the power grid. Lots of positives. Some states, India is not a uniform country. The South and the West are more developed, more advanced in terms of labor capabilities.

A lot of manufacturing coming there. I sort of advise the state of Tamil Nadu. There's a lot of Asian manufacturing, which is coming. Crocs opening a plant there, we have Foxconn, etc. A lot of them looking at Indian women. Discipline workforce, educated, and they want them to work in their factories. So that's the good news. India still has issues with bureaucracy. It has issues with taxation. We need to make the taxation much more predictable. It has still issues with, yes, there are a strong group of Indian engineers that you can

due to improve engineering. This is why a whole number of companies are starting what they call global capability centers in India to do their R&D. But getting high school-educated, good quality workers, you've got to go to the south and the west because they're not so available in other parts of the country.

So India has to work harder there. If we didn't have the kind of tariffs that the US put on India, it would look a lot more attractive. I think they're working on it. You know, there's some good news emerging on Indian purchases of Russian oil and so on. So I think there will be a deal done. India could well be one of the alternatives to China. But is there a place for a 1.4 billion country, even as China

stays in manufacturing with a 1.4 billion population? Probably not. And that's where India is going to be much more focused on services. We have to see what AI does there. But Indian services is the positive growth story for India. India now accounts for about 4.5% of service exports in the world, and that's growing really fast. Indian service exports are on par with Indian manufacturing exports. So it's something that I think you will look to more, you know, where's the labor arbitrage today?

It's not in your low-skilled worker. It's in your high-skilled worker. An Indian MBA costs you $50,000 from the best schools in India. A U.S. MBA, whom I teach, costs you about five times that amount. That's where the labor arbitrage is, because today you can employ that worker there and give a presentation to your client here. That's what the pandemic did. That's why services are exploding.

Since you mentioned tariffs and we were talking about manufacturing, what responsibility, if any, and what ability does the central bank in India have to offset the impact of the tariff? This is true of central banks everywhere, right? The tariff, since it's largely set by the U.S. and others haven't joined in yet, is a demand shock for the rest of the world. They're not seeing as much in terms of demand in the U.S. and a supply shock for the U.S. So that's another reason why inflation may be higher in the U.S., where our star is sort of higher. And for the rest of the world, it's an opportunity to lower rates.

And, I mean, if you look at Indian inflation, it's been lower than anticipated. Again, I usually don't comment on Indian monetary policy. People think I know more than I do, and I don't. But across the world, I think there is more scope for the central banks to come in. I would still say that you do need to look at, you know, froth. More so in the U.S. where the froth seems to be more pronounced. But certainly, I mean, Japan is a place where inflation is because, up and people are getting more antsy about inflation. And Central Bank has sort of stayed a little

behind the curve to make sure that it is sustained inflation. At some point, it'll have to react. So, but barring that, most of the countries have room to actually cut rates. Let's actually, let's go back to Frost with our few minutes left. You mentioned the sort of risks that emerge when the central bank is in cutting mode at a time when financial conditions are already loose, et cetera. Push that forward a little bit. If there is some, event, something bad happens. It's not going to look like 2008. Most likely, the balance sheets of households are a lot of stronger. Banks seem to be much stronger than they were. Where would you look for something actually bad emerging out of this sort of cocktail that you described?

That's a great question, because leverage, so the dot-com bust wasn't as big a deal. Yeah. And that's what gave the Fed confidence. You remember the Alan Greenspan speech in 2004? effectively, we can't predict bubbles, what's a bubble and what's not when it's building, but we can pick up the pieces when it bursts. And so therefore, we're not going to try and ward off bubbles. This is despite his irrational exuberance speech, which was prescient, but it didn't act on it, right? He'd made that speech in 96. Now, the point I'm trying to make is it's leverage which kills.

Because leverage then transmits through the system, the hundred billion. in subprime mortgage-backed securities that were naked. That's the problem. We don't really know. So I can tell you the candidates. There's been a huge increase in private credit. There is a huge increase in low-quality bonds without the bond covenants and the kind of credit events

and the violence on creditors that's happening. How much of that? But it also depends on who holds them. Are these entities that have run up? claims? Are these entities that a lot of other borrowers depend on so that when they shut down, somebody gets cut out of the market and then there's the sequence of defaults? Is there a contagion built in somewhere? So if you look at the 2008-7-8 crisis, when did the problems really build up in 5-6-7? And John Taylor sort of has this graph showing that the Fed policy was too easy.

It should have raised rates much more at that point, according to the... Taylor Rule. One can debate that and Bernanke has debated that. But the point is the problems emerge in the time of too easy money before it collapses. So we are in that period when things look really good. The future looks infinitely rosy. And this is where, you know, you can see that credit standards may weaken. Banks have a lot of money that they want to lend. They are lending to the guys who pass the private credit on. And so there's a lot of exposure there. You know, the IMF came out with some statements yesterday that a whole bunch of banks their tier one capital would be wiped out if there was serious defaults in the private credit industry. So lots of connections,

building froth, a huge technology which promises infinite bounty, these are all worrisome signs. Does it have to lead to a bus? No. But these are, there's a famous, paper in 2002 by Claudia Boria and Philip Lowe, who became governor of the Reserve Bank of Australia, which basically says the combination to worry about is an increase in asset prices and an increase in credit. When you see both run for the hills. So we're seeing that emerging. Shall I try one more time to get that headline very, very quickly. Is private credit your candidate for an upcoming financial blowup? No, I would say it's a combination of the untested private credit and the fact that we have huge hopes built into the future

and are investing accordingly. It's that combination. Credit plus asset prices we seem to project a glorious future, which I worry about. Again, it's not a certainty about a blow-up, but it's a cause for worry. You also said run for the hills. I'm going to make that. I'm going to make the tweet. Raghon Rajan, thank you so much. for doing this. Really appreciate getting the chance to chat with. All right, that was our episode with Raghu Rajan, recorded live in front of an audience at the annual IIF meetings in Washington, D.C. This has been another episode of the Oddlots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Jill Wisenthal. You can follow me at The Stallwart. Follow our producers, Carmen Rodriguez, at Carmen Armand.

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