Raghuram Rajan on Surging Gold and Growing Risks to Financial Stability

Summary

Odd Lots Podcast Summary

Episode: Raghuram Rajan on Surging Gold and Growing Risks to Financial Stability

Date: October 20, 2025
Hosts: Joe Weisenthal & Tracy Alloway
Guest: Raghuram Rajan (Professor, University of Chicago Booth School of Business; former Governor, Reserve Bank of India)
Location: Recorded live at the Institute for International Finance, Washington D.C.

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Episode Overview

This live episode features Raghuram Rajan, one of the most respected voices in global finance, renowned for his prescient warnings about systemic risk ahead of the 2008 crisis. Rajan joins Joe and Tracy to unpack the recent surge in gold, the evolving nature of financial system risks, the credibility of dollar alternatives, political turmoil undermining central banks, and the paradoxes roiling global markets. The conversation ranges from gold’s rally to the froth in equities and private credit, central bank dilemmas, and the interplay between institutional strength and political consensus.

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Key Themes & Discussion Points

1. The Surging Price of Gold

Main Points:

• Multipronged Drivers: Rajan rejects a single explanation, citing geopolitics, distrust in developed economies, central bank diversification, and easy financial conditions as overlapping causes.
• Geopolitical Fear: In the wake of Russia’s reserve seizure post-Ukraine, central banks fear “weaponization of payments” and are stockpiling physical gold, wary that FX reserves in foreign jurisdictions could be frozen overnight.
• Questioning ‘Safe Assets’: With rising debt and political tension in the US, EU, and Japan, the very concept of a “safe asset” is under scrutiny, further boosting gold.
• Speculative Froth: Rajan acknowledges that market hype is also a factor, as gold rallies alongside risk assets.

“So a movement to gold for that reason may have started initially, a lot of central banks moving, but there are other reasons... What’s the safe asset today if you look around the world?”
— Raghuram Rajan [02:55]

“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.”
— Raghuram Rajan [06:02]

2. Dollar Dominance, BRICS, and Dollar Alternatives

Main Points:

• TINA—There Is No Alternative: Despite attempts at diversification, the US Treasury market remains by far the deepest and most trusted. Alternatives (like BRICS) suffer from internal divisions and a lack of real cohesion.
• Weaponization of Finance: G7 sanctions and payment network exclusions have catalyzed efforts to build backups to SWIFT, even for countries not facing Western sanctions.
• On BRICS: Rajan is dismissive about its potential for delivering a true dollar alternative, citing political divergence, especially after including countries like Iran.

“It becomes much less cohesive and seems much more like an anti-west kind of structure, which certainly India doesn’t subscribe to, which Brazil probably doesn’t.”
— Raghuram Rajan [08:47]

3. Market Paradoxes: Concurrent All-Time Highs in Gold and Stocks

Main Points:

• Historical Cycles: Every major crisis follows a pattern of accommodative policy, risk buildup, and tightening leading to collapse.
• Unfinished Tightening: Rajan warns that the system has not absorbed a true tightening cycle; fiscal and regulatory interventions during the pandemic papered over cracks.
• Froth: Asset markets are “priced for perfection” as rate cuts are anticipated despite persistent inflation and uneven supply/demand conditions.

“Easy times, that’s when the risks build up. Tightening, that’s when it starts crumbling and it falls apart... The more the credit in the easy phase, the worse it is.”
— Raghuram Rajan [11:28]

“Going forward, you have a lot of froth in the system... and you have some risks that in fact it may go the other way.”
— Raghuram Rajan [14:49]

4. Is Policy Really Restrictive? Rethinking Monetary Tightening

Main Points:

• Financial Conditions Still Loose: Mainstream talk of restrictive policy is misleading—outside of mortgages, credit remains cheap and spreads tight.
• Central Bank Focus: Rajan is concerned that central banks are underestimating the build-up in risky lending and froth, deferring responsibility for financial stability.

“Whatever the Fed is saying about restrictive, yes, there’s one part where it’s really restrictive... But everywhere else, look at credit spreads, they’re really at historic lows.”
— Raghuram Rajan [19:18]

5. AI Investment Boom: Malinvestment or Productivity Miracle?

Main Points:

• Parallels to Dotcom Bubble: Rajan compares today’s AI infrastructure spree to the telecom/network bubble; postulates that much of today’s spending will lag in realizing returns.
• Central Bank Challenge: The pace of productive adoption is critical—central banks should incorporate this risk into rate decisions and supervision.

“It’s that transition from when the infrastructure is created to when people use it and pay for it, which is the big issue.”
— Raghuram Rajan [21:37]

6. Political Dysfunctions and Central Bank Autonomy

Main Points:

• Institutional Resilience Depends on Politics: Rajan debunks the myth that imported Western policies automatically build robust institutions in other countries—it’s political consensus that underpins strong central banks, not legal mandates alone.
• Threat to Central Bank Independence: He warns that rising polarization in industrialized countries weakens consensus and thus institutions: “Institutions cannot be made fully independent. They will always bend, and that’s what we’re seeing.”

“Our confidence in industrial country institutions should be directly proportional to our confidence in the politics being consensual. And that consensus... has broken down.”
— Raghuram Rajan [27:25]

“What would be harmful for the Fed is if it becomes obvious that the Fed created a recession... and that is why you bend.”
— Raghuram Rajan [29:21]

7. Lessons from Running India’s Central Bank: Personal and Political

Main Points:

• Withstanding Pressure: Rajan stresses the importance of backbone for central bankers, especially when targets of political lobbying for easy money.
• Explaining Decisions: Success requires clear communication about the trade-offs between supporting growth and curbing inflation.

“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... But you are meant to be their protection and it’s important you recognize that and have the backbone to stand up.”
— Raghuram Rajan [35:48]

8. India as a Manufacturing and Services Power: Constraints and Opportunities

Main Points:

• Infrastructure Improvements: Major cities match global standards, but power and workforce quality vary by region.
• Services Over Manufacturing: Labour arbitrage favors high-skilled workers—India’s services story may eclipse its manufacturing growth.

“Where’s the labor arbitrage today? It’s not in your low skilled worker, it’s in your high skilled worker... That’s why services are exploding.”
— Raghuram Rajan [38:20]

9. Where Could the Next Blow-up Emerge? Risks in Private Credit & Asset Bubbles

Main Points:

• Leverage Is the Trigger: Crises tend to propagate via leveraged markets. Weak credit standards and rapid private credit growth are flagged as areas of risk.
• Asset Prices and Credit: The dangerous combination is rising credit and rising asset prices—when both climb, the system is at risk.

“There’s been a huge increase in private credit... 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.”
— Raghuram Rajan [43:38]

“The combination to worry about is an increase in asset prices and an increase in credit when you see both run for the hills.”
— Raghuram Rajan [46:38]

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Notable Quotes & Memorable Moments

• On Trust and Gold:
  “If Canada can turn out to be antagonistic to a close neighbour, what about a country 5,000 miles away?”
  — Raghuram Rajan [06:29]

• On BRICS and Dollar Alternatives:
  “Forget about it. That’s not going to happen. May they build up a payment system which is different. Yeah... But does that mean I’m going to go towards a currency? Probably not.”
  — Raghuram Rajan [09:50]

• On the Dangers of Financial Complacency:
  “We are in that period when things look really good. The future looks infinitely rosy. And this is where you can see that credit standards may weaken.”
  — Raghuram Rajan [44:55]

• Podcast Moment for Social Media:
  “Run for the hills.”
  — Raghuram Rajan [46:38]

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Timestamps for Key Segments

• Intro & Purpose of Live Episode – 01:48 - 02:19
• Why is Gold Surging? – 02:55 - 04:25
• Reserve Diversification & Gold – 04:33 - 05:22
• Seizure of Russian Assets/Weaponization of Payments – 05:22 - 07:00
• The Enduring Allure of the Dollar – 07:00 - 08:14
• BRICS & Attempts at an Alternative System – 08:14 - 10:32
• Asset Price Paradoxes & Financial Stability Cycle – 10:32 - 15:19
• Is US Monetary Policy Really Restrictive? – 18:49 - 21:08
• Aid Investment Boom and Central Bank Challenge – 21:08 - 24:24
• Political Dysfunction & Central Bank Autonomy – 24:24 - 29:19
• Inflation Targeting and Political Considerations at the RBI – 35:32 - 37:45
• India’s Role in Manufacturing/Services – 37:45 - 41:40
• Trade, Tariffs, and Monetary Policy – 41:40 - 43:06
• Biggest Current Risks: Private Credit & Asset Prices – 43:06 - 47:13

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Conclusion

In one of the most incisive Odd Lots episodes, Raghuram Rajan sounds the alarm on the fragility running through today’s financial system. He paints a picture of a world rife with mistrust, political volatility, and speculative excess—and with the ghosts of past crises lurking just beneath the surface. From the gold rush to the ascent of private credit, the conversation is wide ranging but tightly focused on the biggest question: Is the financial system once again building the seeds of its next crisis under the veneer of prosperity?

“The combination to worry about is an increase in asset prices and an increase in credit—when you see both, run for the hills.” — Raghuram Rajan [46:38]

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Transcript

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[Joe Weisenthal]

Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

[Tracy Alloway]

And I'm Tracy Alloway.

[Joe Weisenthal]

Today listeners get a special live episode of the podcast that we recorded in Washington, D.C. at the annual for the Institute for International Finance.

[Tracy Alloway]

That's right. We spoke with Raghuram Rajan. He is a professor at the University of Chicago Booth School of Business and of course the former head of India's Central Bank. And he is exactly the person you want to talk to when everyone seems to be talking about risks in the market.

[Joe Weisenthal]

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 he talked about what's behind the surge in gold, what's going on, 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 non stop demand for gold right now?

[Raghuram Rajan]

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, 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, 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 till the eye can see. So 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 frost. So you can't completely discount the fact that gold prices are are probably moving along with froth as everything else.

[Tracy Alloway]

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?

[Raghuram Rajan]

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 once you get beyond the big reserve currencies, 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. How do you convince 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 world to another. But if it's in your home country, it's harder. You need to rent a 747 to take it elsewhere.

[Joe Weisenthal]

Yeah, I was talking to someone last night who pointed this out. 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 this sort of nice, stable relationship. And they pointed out, if you really look at when the divergence occurred, it was 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 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?

[Raghuram Rajan]

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 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 neighbour, 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.

[Tracy Alloway]

So it feels like we're at 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 US dollar and US 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?

[Raghuram Rajan]

Well, I think part of the reason is the Tina factor. There is no alternative. Right. The US 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 US 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 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.

[Joe Weisenthal]

Speaking of dollar alternatives or there is no alternative. Okay, we talk about gold. President Trump perceives the existence of this entity called the BRICS to be an assault on the US 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 gonna be growth. 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? So how should we think about this entity?

[Raghuram Rajan]

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. And of course China has been spectacular in the early years of the brics 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, you know, most in the world, it's. It's China. So even on the green issue, there is a divergence in opinion. I think with the addition to brics 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 brics, there are antagonisms. Right. India and China fought a 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. If 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.

[Tracy Alloway]

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, but, 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?

[Joe Weisenthal]

Please say something equivalently historic on this stage for our podcast. That's all we're asking.

[Raghuram Rajan]

Let me say something historic in the sense of talking about history.

[Joe Weisenthal]

Okay.

[Raghuram Rajan]

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, yeah, 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. Whether that U 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. Okay. 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 tightening. Now, immediate reaction. Well, we had a tightening. Nothing 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 bailed out. Remember the provision at the beginning of the pandemic? Nothing actually happened because things like the paycheck protection 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 US 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 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 3. It's still nowhere near 2. People are 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 US 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.

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[Joe Weisenthal]

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 Dimon 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 us?

[Raghuram Rajan]

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, R 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 what does it really mean? But look at the Chicago Financial Conditions Index. 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, 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 where about inflation versus growth. And 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 shape 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 financed by credit. Maybe it is some of the weak credit standards that are building First Brands as an example. Froth is when the problems are built. And we should keep that in mind.

[Tracy Alloway]

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?

[Raghuram Rajan]

Well, this is the great Austrian dilemma, right? What the Austrian economists used to call malinvestment. Is this mal investment 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 ChatGPT. So there are ways that 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 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, whether we're really in a boom time and 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.

[Joe Weisenthal]

We started this conversation, 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 Dysfunctions 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?

[Raghuram Rajan]

It's a great question. 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.

[Joe Weisenthal]

It's that simple. Just build good institutions. What's the challenge?

[Raghuram Rajan]

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 its independence, okay? 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 power. 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 pact, and I think you can see this again and again in many emerging markets. Why am I telling this 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 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 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 seeing. It's the politics that has changed, not so much the institution.

[Tracy Alloway]

Is there anything a central bank can do to, if not be fully independent, at least protect its ability to say no?

[Raghuram Rajan]

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 are some battles they really have to fight and say, look, you know, 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. His 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.

[Joe Weisenthal]

Eventually the term expires.

[Raghuram Rajan]

One, 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 fall 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. But that comes at the cost of potentially sort of weighing the risks on both sides and maybe cutting when inflation is still a much bigger issue. In other times, you might be more resistant to these cuts.

[Joe Weisenthal]

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 or whenever that was. So they made a lot of progress, but it 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.

[Raghuram Rajan]

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, 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, this is 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 2, it's just which risk is bigger.

[Carol Massar]

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[Tracy Alloway]

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?

[Raghuram Rajan]

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 backbone 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. I, 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 backbone. The fact that you can say no is very, very important. 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.

[Joe Weisenthal]

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 pull 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?

[Raghuram Rajan]

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 Indian 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 in the world have. So infrastructure, great job, makes it much easier. Still some issues to be ironed out. Power is an issue that needs 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. 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, et cetera. A lot of them looking at Indian women, disciplined, 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 do 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 and 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. 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. 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 US 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.

[Tracy Alloway]

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 tariffs?

[Raghuram Rajan]

This is true of central banks everywhere. Right. The tariff, since it's largely set by the US 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 US and is supply shock for the us so that's another reason why inflation may be higher in the US where R 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 froth more so in the US where the froth seems to be more pronounced. But certainly, I mean, Japan is a place where inflation is picking 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. But barring that, most other countries have room to actually cut rates.

[Joe Weisenthal]

Let's actually, let's go back to froth 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 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?

[Raghuram Rajan]

That's a great question because leverage. So the dot com bust wasn't as big a deal.

[Joe Weisenthal]

Yeah.

[Raghuram Rajan]

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, exuberant speech which was prescient but 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 100 billion in subprime mortgage backed securities. That was what? 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 what's the violence on creditors that's happening? How much of that? But it also depends on who holds them. Are these entities that have runnable 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, when did the problems really build up? In 567. 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 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. 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 loss of connections, building froth, a huge technology which promises infinite bounty. These are all worrisome signs. Does it have to lead to a bust? No. But there's a famous paper in 2002 by Claudio Borio 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.

[Tracy Alloway]

Shall I try one more time to get that headline very, very quickly? Is private credit your candidate for an upcoming financial blowup?

[Raghuram Rajan]

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 which 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.

[Joe Weisenthal]

You also said run for the hills. I'm going to make that. I'm going to make the tweet. Raghav and Rajan, thank you so much for doing this. Really appreciate getting the chance to chat with you.

[Tracy Alloway]

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. dC. This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me at Tracee Alloway.

[Joe Weisenthal]

And I'm Jill Wiesenthal. You can follow me at the Stalwart. Follow our producers Carmen Rodriguez at Carmenarmon, Dash O' Bennett at Dashbot and Kale Brooks at Kalebrooks. For more Odd Lots content go to bloomberg.com oddlots we have a daily newsletter and all of our episodes and you can chat about all of these topics 24. 7 in our Discord, Discord GG oddlots.

[Tracy Alloway]

And if you enjoy Odd Thoughts, if you like it when we record these live episodes then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listen. SA.

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