Rajan is the international finance man to watch

There is a void in the international finance community, leadership. None is really coming from the US; however, Raghuram Rajan, the former University of Chicago economist and now the head of the central bank of India, seems to be taking up a key leadership or agenda setting role. However, if anyone is expected leadership that is consistent with US financial hegemony and the "Washington Consensus" you will have to think again.

His argument against the current internation direction is very simple for the emerging market to understand and accept. It is hard to ask emerging market countries to hold their exchange rates stable when the Fed floods the market with liquidity that will potentially lead to destabilizing capital flows. Given the US is an open economy and the world reserve currency, the Fed lowering rates to zero will cause capital to seek other homes. Those homes may not be the US. Money will flow to countries that have higher real interest rates. Having higher real interest rates is easy when the Fed is driving real rates negative.

Those capital inflows will drive up exchange rates and capital markets as herds of investors pile into countries that do not have deep liquid capital markets. Having foreign capital move into a country is not always bad. If there is a capital shortage and good investment opportunities, it leads to better development, but if there are not viable projects, the capital flows will cause local financial bubbles. Additionally, once the loose rate policies start to reverse, the money flow will start to come out of these countries and lead to currency depreciation and capital sector that sees a devastation. We had the QE boom and now we are ready for the taper bust. 

Rajan wold argue that the current policies of many EM countries should continue and is in their best interests. These policies are add odds with freely floating exchnage rates and open capital markets. Reduce current account deficits, keep exchange rates competitive, and build your foreign reserve war chest in case there is a "sudden stop".  A policy that will keep EM currencies cheap means that the dollar will not decline and US exports will be thrive on cheap prices.

What is clear is that EM markets have a well-regarded spokesman who is willing to take a view that is not consistent with the views of the Washington consensus.