Foreseer of financial crisis Raghuram Rajan warns of toxic mix on trade

Raghuram G Rajan, who warned of a credit crisis in 2005 before it hit, is now cautioning that trade wars, when combined with a build-up in leverage and high asset prices, could result in a toxic mix that dragged global growth.

“We are all very well aware that two things have built up, which had built up before the previous crisis, leverage and asset prices,” Rajan, a former governor of the Reserve Bank of India, said in a Bloomberg Television interview Thursday. “Trade is an issue for the world to be concerned about. It is extremely important that we have good outcomes there. By all means, negotiate, but don’t pull the nuclear trigger there.”

While global growth has been strong in recent years, the concern is how long can it continue, and whether elevated asset prices are justified on the basis of it, Rajan said at Jackson Hole, Wyoming, the same place where he warned of credit risks in 2005. Moves by the U.S. or China on trade threaten that growth at a time when underlying conditions are fragile, and some emerging market nations are highly levered, he said.