Arpit Gupta, a friend and colleague of mine, has written a smart review of Raghuram Rajan’s Fault Lines. Though Gupta is broadly in agreement with Rajan’s central claims, he raises a number of interesting questions. For example, Rajan suggests that populist credit expansion was a response to wage stagnation. Arpit suggests, in contrast, that populist credit expansion is “baked in” to U.S. politics.

Political efforts to extend the supply of credit have a long pedigree in American politics, from the deregulation of banking in the early 20th century, to the surge in thrift lending, to the present day. Yet it is exactly the omnipresence of populist lending which calls into doubt the causal role of inequality in this story. In the 1996 election, Dole ran on a platform of capital gains cuts, and Clinton ultimately drastically increased the exemption for capital gains tax for housing investment (a reform Vernon Smith blames for part of the subsequent housing bubble). As Rajan notes, Clinton also increased the share of government agency loans going to low-income borrowers. Yet this growth in populist lending happened during the most durable period of income growth in the last thirty years. Even if stagnant wages may drive politicians decisions on populist lending to an extent; it’s not clear that these populist pressures would suddenly disappear in the presence of rising wages.

Arpit is also skeptical of Rajan’s argument — drawing on an analysis by Edward Pinto — that the GSEs were heavily involved in subprime-like financial products. The review is well worth your time, as is Fault Lines.