Robert Shiller calls for a public works program in the face of high unemployment.

Nancy Koehn reviews Raghuram G. Rajan's new book "Fault Lines."

Looks good even if Rajan is a member of the Pain Caucus.

Basically, his view is that because of America's weak social safety net,* the Fed needs to keep interest rates low in order to keep unemployment low (something Martin Wolf has said also).

He cites three fault lines: domestic political stresses; trade imbalances among countries; and the tensions produced when financial systems with very different structures interact. All three came together to damage the financial sector in 2008, he says, and could meet again to cause another crisis.

The map that Mr. Rajan traces starts with rising income inequality in the United States -- a powerful domestic stress. Washington’s response was to provide easy credit, in particular a national home ownership strategy.

At the same time, many of the world’s big economies, including Japan, Germany and China, were growing more dependent on American demand for their exports. These nations were left with a relatively weak domestic-oriented sector. A reliance on exports led to huge trade imbalances among countries, creating another fault line.

Yet another fault line occurred with the meeting of two distinct financial systems. The first, which he calls an arms-length system, is based on transparency and legal safeguards, like those of the United States and Britain. The second, a relationship system, relies on close, informal ties among people and institutions. Examples of the latter include China, Japan and South Korea.

Mr. Rajan says foreign investors from arms-length systems who put capital in countries with relationship systems tend to erect safeguards to lower their risk -- like offering short-term loans that can be withdrawn quickly.

He describes the potentially destructive consequences of this strategy -- directly for the borrowing countries, and indirectly for the global economy. For example, when loans in countries like Indonesia started underperforming in the late 1990s, foreign investors reacted by yanking out their money. Many developing countries then experienced devastating financial crises.

Indonesia and other nations that relied on this type of foreign capital thus inadvertently left themselves open to debilitating booms and busts. It’s understandable, then, that some countries turned instead to the perceived safety of export-led growth, with its commitment to an undervalued currency and its buildup of foreign exchange reserves. The consumer-driven United States was an obvious choice to receive these exports, becoming the "demander of last resort."

All of these fault lines met in an amoral global financial system sustained by United States monetary policy. Beginning in the early 1990s, the Federal Reserve chose to keep interest rates relatively low in response to economic recoveries characterized by slow job creation and, in some instances, job losses.

"The U.S. political system," Mr. Rajan notes, "is acutely sensitive to job growth because of the economy’s weak safety nets," creating pressure for a series of ad hoc policies that have effectively steered the American economy from bubble to bubble and created damaging incentives.

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* Thanks to Bill Clinton and "New" Democrats. Clinton also developed the strategy of increasing home ownership among low income workers as a way to combat increased inequality, a cause George W. Bush happily took up.