"The current development is reminiscent of the dot-com bubble and the financial crisis."
Dec 2025
Experienced central banker and market expert
Raghuram Rajan knows a thing or two about crises: the former head of the Indian central bank predicted the crash of 2008. Today, he sees dangerous parallels between that crash and the AI boom. This is a conversation with Neue Zürcher Zeitung along the sidelines of the UBS Center Forum.
This interview by Thomas Fuster and Albert Steck was originally published in NZZ on 21.11.2025 in German. Translated and edited for context purposes by the UBS Center.
His words of warning carry weight. Raghuram Rajan warned of a freeze in the interbank market and a financial crisis back in 2005. No one wanted to listen. But a few years later, the predictions of the former chief economist of the International Monetary Fund came to pass: the financial markets collapsed.
Mr. Rajan, you were one of the few people who warned of the 2008 global financial crisis in advance. Is the bubble scenario repeating itself with the enormous boom in artificial intelligence?
There is a risk of that happening. Current developments are reminiscent of both the internet bubble of 2001 and the financial crisis of 2008. The rise of the internet at the turn of the century also changed the world dramatically. However, many of the pioneering companies have since disappeared. Conversely, a large number of today's leading corporations did not even exist at the time. Another similarity with the 2008 financial crisis is that strong credit growth is fueling the AI euphoria. One has to ask whether the huge investments will pay off.
So could the party on the stock market soon be over?
I don't think a crisis is imminent. But the boom is entering a critical phase. This is because loans, rather than companies’ own earnings, are increasingly financing innovation.
The US Federal Reserve could slow down credit growth with a restrictive monetary policy. Instead, it is lowering interest rates and opening the floodgates. Is it making a mistake?
Concerned that the labor market could weaken, the Fed has lowered its key interest rate several times. But it should not reduce interest rates preventively until it is clear that a slump is actually happening. Instead, it should focus more on the financial markets. Risk appetite is very high, probably also due to the so-called Fed put: the markets expect the central bank to come to their aid in the event of price losses by lowering interest rates and pumping money into the system. This expectation increases the willingness to take even more risks. Currently, all markets are booming, from stocks to gold to cryptocurrencies.
Not only are asset prices rising, but consumer prices are also increasing: annual inflation in the US stands at 3 percent. Is the Fed underestimating the harmful effects of inflation?
In fact, dissatisfaction among the population is growing due to price developments. Many consumers are complaining about the high cost of food, especially meat, and gasoline. This is less about what the statistics show and more about peoples’ personal assessments of how affordable everyday life is for them.
Inflation in the US climbed to over 9 percent after the pandemic. Now, tariffs are threatening to push prices up again. Do you see a danger that persistently high inflation will undermine confidence in the state and democracy?
Historically, high inflation rates are a strong indicator that a country is being poorly governed. Inflation makes people unhappy. In a positive scenario, this can lead to a government being voted out of office without damaging democratic institutions. However, we also know that the hyperinflation in Germany in the 1920s destroyed the middle class, which paved the way for Adolf Hitler to come to power. With inflation at 3 to 4 percent, we are still a long way from such a development.
Added to this is the record-high level of government debt.
That is indeed frightening. Countries need to get their debts under control. Central banks are fighting a losing battle against inflation if governments simultaneously fuel the economy with ever-increasing spending. I also consider US President Trump's latest proposal to pay every citizen $2,000 to be counterproductive.
Behind the AI boom is the hope that the US and the West will win the race for technological leadership against China. Is this hope justified?
The West beats China when it comes to research, innovation, and design. Conversely, China is better at implementation. The country recently built a 30,000-kilometer network for high-speed trains. It is also better at providing the energy and computing power required for AI. Who wins depends on whether the West's cleverness or China's industrial power will result in a decisive advantage. The answer is still open.
However, Europe is lags behind in both innovation and implementation.
I am not so pessimistic about Europe. The continent has excellent universities and innovative companies. However, it is true that the willingness to take entrepreneurial risks is greater in the US.
Isn't Europe already so far behind that it has missed the boat?
No. When it comes to AI, it often seems as if it were a race to the moon. But I don't think that's a valid comparison. A more accurate comparison would be the nuclear arms race. Even those countries that did not have the first nuclear weapon still had enough time to catch up afterwards. The battle for AI is far from over.
Europe is also caught between the fronts in the trade dispute. What went wrong with globalization?
Free trade is beneficial in the long term, but it creates winners and losers – within and between countries. We failed to compensate the losers. The upper middle class benefited from cheaper goods, while jobs were lost in the lower middle class. Migration put additional pressure on wages, and automation destroyed more jobs.
So Donald Trump is right in his criticism of globalization?
As I said, there are winners and losers—it's not a win-win situation. But if you stop trade or migration because of this situation, you create new imbalances. Trade should therefore continue. And while control is important when it comes to migration, many aging industrialized countries need immigration. It is important to enable continuous training, as is the case in Scandinavia or Switzerland, because technology and trade are making work increasingly insecure.
Trump considers China's aggressive export policy to be the reason for America's large trade deficit. Is that true?
For every seller, there is a buyer – the US benefits from cheap imports. Walmart customers would hardly buy cheap Chinese washing machines if they were 50 percent more expensive. The idea that the US is a victim of trade is therefore too simplistic. There are unfair aspects, such as unequal tariffs or subsidies: China subsidizes through its financial system, the US through bailout packages. But at their core, both sides benefit. China could also say that the US consumes too much and thus pollutes the environment. That would be just as legitimate as the claim that China is forcing the US to buy cheap products.
China appears to be the winner in the trade dispute, especially since Trump underestimated China's strength. Do you agree?
The US underestimated the extent to which China would use its rare earths and how strongly this would affect the economy. However, I do not see China as the winner. China has asserted itself up until now by channeling its exports to the US via other East Asian countries. The US wants to prevent this, but that is difficult. In addition, the US is intensively searching for alternatives to rare earths, for example in Brazil or South Africa.
Does the race thus remain open?
The crucial question is when the two countries will accept coexistence instead of rivalry. At the moment, each country seems to want to limit the power of the other. As long as this remains the case, the conflict could quickly flare up again. It is therefore too early to declare China the winner.
That said, China has gained in reputation in the emerging markets.
Yes, China's reputation has improved, but above all, the US has lost prestige. There are reasons to renegotiate some trade agreements, and in some cases, these were indeed unfair to the US. But this adjustment is occurring so unscientifically that the reliability of the US is being called into question. China has taken advantage of this, as its policies appear to be more stable. However, China's handling of rare earths makes it clear that turning away from America is not the solution either. China and the US must resolve their conflict, otherwise many other countries will suffer.
How stable would a bipolar world with America and China as the two hegemons be in the long term?
The situation is not stable because third countries try to ally with both powers, but the two hegemons exert pressure on these countries and demand: “Choose me!” This can be seen in agreements between the US and East Asian countries, in which the latter are pressured to support the US in the event of a conflict.
That is the logic of the Cold War.
Yes. The only stable solution would be a division into two blocs where trade does not create dependencies. That would be bad for both sides, but stable. As long as interdependence exists and the principle of “live and let live” does not prevail, every country will try to secure advantages for itself, which perpetuates the conflict.
The US also wants monetary policy advantages. Trump considers it a disadvantage that the dollar is the global reserve currency.
Wrongly so. The US dollar is privileged. It allows the US to borrow money relatively cheaply from around the world. As long as all other nations are willing to finance the US, the country will never have to address its budget deficit.
Nevertheless, there is a feeling that doubts about the stability of the Western financial system are growing, also in view of the rising price of gold. Investors such as Ray Dalio even consider a collapse of the US financial system to be possible.
That is very pessimistic. The probability of such a scenario seems low to me. If the situation were so bad, why do ten-year US government bonds only yield 4.1 percent? If this scenario were a real possibility, the yield would have to be much higher. If you believe that the Fed will be forced to allow inflation to rise sharply and that the government can no longer be trusted at all, bond yields do not reflect the situation.
Sentiment can change quickly. We saw this in the UK under Liz Truss. Her debt-financed tax cut package led to an immediate loss of confidence and rapidly rising bond yields.
That's true. But market prices do not currently indicate a sentiment that Western governments are no longer financially viable. Government bonds are a very liquid market with many participants. And this market has not yet given up on government bonds. It is thus too early to say that everything will go wrong. But of course, it could go wrong. That's why you have to prepare for bad times when times are good.
Raghuram Rajan knows a thing or two about crises: the former head of the Indian central bank predicted the crash of 2008. Today, he sees dangerous parallels between that crash and the AI boom. This is a conversation with Neue Zürcher Zeitung along the sidelines of the UBS Center Forum.
This interview by Thomas Fuster and Albert Steck was originally published in NZZ on 21.11.2025 in German. Translated and edited for context purposes by the UBS Center.
His words of warning carry weight. Raghuram Rajan warned of a freeze in the interbank market and a financial crisis back in 2005. No one wanted to listen. But a few years later, the predictions of the former chief economist of the International Monetary Fund came to pass: the financial markets collapsed.
Raghuram Rajan is one of the most renowned experts on financial markets. Born in Bhopal in 1963, the University of Chicago professor was Chief Economist of the International Monetary Fund from 2003 to the end of 2006. From 2013 to 2016, Rajan also headed the Reserve Bank of India, where he succeeded in bringing inflation under control with a restrictive monetary policy. As a scientist who has won a considerable number of awards, he contributed to increasing the importance of financial markets in economics. The interview with Rajan took place in Zurich on the sidelines of a conference organized by the UBS Center for Economics in Society. (tf./sal.)
Keynote
Speaker
Raghuram G. Rajan is the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. From 2013 to 2016, he served as the 23rd Governor of the Reserve Bank of India, where he was widely credited with stabilizing the Indian economy during turbulent global conditions. Earlier in his career, he was Chief Economist and Director of Research at the International Monetary Fund. Professor Rajan has authored several acclaimed books, including Fault Lines, which won the Financial Times Business Book of the Year award, and The Third Pillar, a finalist for the same prize. His recent research has focused on sovereign debt, climate resilience, and liquidity dynamics in modern financial systems. He is a member of the American Academy of Arts and Sciences and currently chairs both the Group of Thirty and the Per Jacobsson Foundation. Rajan’s insights continue to shape the global conversation on financial regulation and inclusive growth.
Raghuram G. Rajan is the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. From 2013 to 2016, he served as the 23rd Governor of the Reserve Bank of India, where he was widely credited with stabilizing the Indian economy during turbulent global conditions. Earlier in his career, he was Chief Economist and Director of Research at the International Monetary Fund. Professor Rajan has authored several acclaimed books, including Fault Lines, which won the Financial Times Business Book of the Year award, and The Third Pillar, a finalist for the same prize. His recent research has focused on sovereign debt, climate resilience, and liquidity dynamics in modern financial systems. He is a member of the American Academy of Arts and Sciences and currently chairs both the Group of Thirty and the Per Jacobsson Foundation. Rajan’s insights continue to shape the global conversation on financial regulation and inclusive growth.