Finance Experts Weigh in on the Strength of Political Institutions

Jack Lew, former U.S. Secretary of the Treasury, and Raghuram Rajan, former Governor of the Reserve Bank of India, visited Columbia to discuss the connections between monetary policy and public support.  

Caroline Harting
February 17, 2020

On January 30, Shailagh Murray, Columbia’s executive vice president for public affairs, moderated a discussion between Jack Lew, former U.S. Treasury secretary, and Raghuram Rajan, former governor of the Reserve Bank of India, before a standing room only audience at Columbia Journalism School. Columbia World Projects (CWP) hosted the event in partnership with Columbia Business School and the School of International and Public Affairs (SIPA).

Opening the evening, Ira Katznelson, interim provost and deputy director of Columbia World Projects, told the audience that CWP’s mission was to make the connection between serious scholarship and “purposeful action in the world.”  Following Katznelson, Merit Janow, dean of SIPA, spoke about how institutions of higher learning are called on to grapple with today’s complicated political issues and then introduced Murray and the panelists, Lew and Rajan.

To frame the evening’s discussion, Murray asserted, “We rely on public institutions as stabilizing forces in our society.” Historically, this has been a given in the United States, but today, she continued, “these institutions are under siege.” Turning to Lew and Rajan, she asked: “How can institutions deliver on the big challenges they face in such a polarized political environment without overstepping their role in a constitutional democracy?”

Here are some comments from the discussion.

The Great Recession 

On what factors allowed for the Great Recession, Rajan said, “It wasn’t that the institutions were breaking down… But of course what happened then, maybe set the stage for what we’re seeing now.” 

Was Pushback to Dodd-Frank Inevitable?

Murray spoke about how Dodd-Frank was a policy response to a huge problem and enacted as a measure to prevent another financial meltdown. The resistance from Republicans started almost immediately, and two years later there was a partial repeal of the law. 

“What they did at the time was profoundly effective,” said Lew on how the government stabilized the economy and possibly saved the United States from falling into a depression by bailing out big financial institutions. “But if you’re sitting in a community that took the brunt of the financial crisis, what it looked like was that the elite institutions were saving the elite institutions.” It is important to note that Dodd-Frank was enacted in this era of distrust. Lew stated that compared to other post-crisis legislation, Dodd-Frank was moderate, but it was passed on a completely partisan basis, fueling Republican outrage.

The European Union Under Siege

Like Dodd-Frank, the European Union was a “gigantic policy response to a crisis,” noted Murray, but now those institutions in the EU are under enormous pressure. What could have been done better? “Post-World War II, there was enormous confidence in the elites,” said Rajan. “People who pushed for integration [in Europe] were given free reign, and it was something the public was okay with because growth was so strong.” Then financial growth stopped around the 1970s. Rajan continued, “If there is a mistake, it is that integration proceeded on the basis of the comfort levels of the elite, rather than what was okay with the population.” 

The Power of Central Banks 

According to Lew, policy restraints have led to the rise in central banks’ power. The banks don’t always make the best political decisions and some people have called for partnerships between the government and the banks. However, ”as long as we have a hyper-partisan dysfunctional legislative system, I worry that without the independence of the monetary authority, God help us in the next financial crisis,” argued Lew. 

“I think central banks have to explain what they do, perhaps much better than what they’ve been doing so far,” commented Rajan on how the Fed and other central banks can safeguard themselves from the public’s dissent. “There is a sense that the central bank is an elite institution,” continued Rajan. “It is important that you establish that relationship [with the public] because it is under threat.”

Are Green Bonds the Answer to Climate Change?

No matter how much one agrees with a certain policy, Lew didn’t think that central banks should direct resources, like green bonds, to solve issues like climate change. It could set a dangerous precedent, he said. 

Rajan agreed with Lew. “Doing it the wrong way, through the wrong institution could surely undermine the eventual outcome.” 

Populist Movements on the Right and Left

“To some extent, the government runs on trust,” said Rajan and that trust allows the public to believe that their government’s often complicated policies are in the best interest for society. “The problem I see with the populist solution is that it resonates because it’s easy to understand, and almost always invariably wrong.” He further stated that the simpler the answer looks on the surface, the more complicated it actually is. For instance, placing tarifs on imported steel to save steelworkers jobs in the U.S. might be popular and easy to understand, but it creates a myriad of issues for other U.S. industries that rely on inexpensive imported steel.

“The problem is this is also a failure of the establishment,” Rajan said. “The paralysis of the establishment creates the opportunities for the left and the right.”

How to Reinstate Faith in Our System From the Ground Up

Murray asked how we can foster trust in our institutions again. Rajan replied that we need to build up our communities. “We have disadvantaged populations, but we also have disadvantaged communities,” he said. Some people leave their impoverished communities to go to cities like San Francisco and New York, but not everyone can do that. “How do we figure out how to get people to go back to their communities to work to build them up, to strengthen their schools, to strengthen their community colleges, to strengthen economic activity… That may be the way we deal with the problems of globalization.”

The night ended with a round of thought-provoking questions from the audience.

Watch the video of the full event below: