Wednesday, October 8, 2008

Every marginal buyers increase risk into the market

Raghuram Rajan writes in the India Today “Essentially, the US financial sector managed to package mortgages to low-credit quality buyers and issued highly rated securities against these packages that foreign investors were willing to buy. They were putting lipstick on a pig. And hindsight suggests these were still pigs”.

Interestingly he writes that “I spoke to central bankers in August 2005, at Greenspan's farewell Jackson Hole conference, about the increasing risks in the financial system. A number of people were worried, but regulators were convinced that markets would take care of themselves”.

If the regulators were convinced wrongly about the market the problems is with regulators not necessarily on market.

What are the lessons for India?

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