In his book Rajan identified three broad categories of systemic problems, or fault lines, all of which are now fairly well known.

One relates to global macroeconomic imbalances, that emerge from the focus of certain major economies (such as Germany, Japan and China) on export-led growth as opposed to domestic consumption, which have been associated with large and growing US external deficits.

Another relates to the wrong incentive structures in the financial system, which were associated with an excessive reliance on short-term instruments, often newly created, and over-reliance on credit ratings. The problems were compounded (and the boom was accelerated) by the US Fed's (US Central Bank's) policy of low interest rates that promoted the bubble.

Underlying all this is a "political" fault line that reflects the consequences of a prolonged adverse income distribution.

Essentially Rajan argued that the massive increase in income inequality in the US over the past three decades was sought to be patched up by providing easy credit, which meant that consumption of wage earners increased even though real wage incomes stagnated, and therefore for at least some time during the boom, consumption inequality did not rise as fast as income inequality.

Greater global integration of both trade and capital flows provided the international dimension to this.

So "The US financial sector thus bridged the gap between an overconsuming and overstimulated US and an underconsuming, understimulated rest of the world. But this entire edifice rested on the housing market."

This reflected active government policy on both sides of the political spectrum, as in an attempt to offset the consequences of rising income inequality, politicians on both sides of the aisle pushed easy housing credit through government sponsored agencies.

While Rajan recognised that "regulation in the United States was driven by the misplaced view that markets would take care of themselves", he found the problem really lay in state policy: "the bulk of the damage was done as the sophisticated financial sector tried to seek an edge that the US government was only too willing to provide".

Image: In this photo taken on November 22, 2010, Frank Wallace, who is unemployed, displays a sign during a "Vigil for the Unemployed" at the Arch Street Methodist Church in Philadelphia.

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