In 2005 Greenspan was still deified. His record was considered stellar.
Mr. Rajan, a professor at the University of Chicago's Booth Graduate School of Business, chose that moment to deliver a paper called "Has Financial Development Made the World Riskier?"
His answer: Yes.Mr. Rajan quickly came under attack as an antimarket Luddite, wistful for old days of regulation.
To oppose Greenspan was to defy orthodoxy, an orthodoxy that seemed unassailable because of the track record of an uninterrupted bull market and endless prosperity.
Today, however, few are dismissing his ideas. The financial crisis has savaged the reputation of Mr. Greenspan and others now seen as having turned a blind eye toward excessive risk-taking.
And Greenspan can not believe he is being attacked; he calls criticisms unfair, and insists no one could have foreseen the financial tsunami that had caused such calamity.
Rajan got it essentially right: Incentives were horribly skewed in the financial sector, with workers reaping rich rewards for making money, but being only lightly penalized for losses ... which encouraged financial firms to invest in complex products with potentially big payoffs, which could on occasion fail spectacularly.
He pointed to "credit-default swaps," which act as insurance against bond defaults. He said insurers and others were generating big returns selling these swaps with the appearance of taking on little risk, even though the pain could be immense if defaults actually occurred.
Mr. Rajan also argued that because banks were holding a portion of the credit securities they created on their books, if those securities ran into trouble, the banking system itself would be at risk. Banks would lose confidence in one another, he said: "The interbank market could freeze up, and one could well have a full-blown financial crisis."
It all came to pass. What is rather worrisome is how one critic treated Rajan's analysis: Former Treasury Secretary Lawrence Summers, famous among economists for his blistering attacks, told the audience he found "the basic, slightly lead-eyed premise of [Mr. Rajan's] paper to be misguided."
Summers is going to be in charge of the Obama administration's National Economic Council. I can only hope he has learned something from this misguided criticism.
The Jackson Hole contretemps followed by a few months another set of attacks on Mr. Rajan for a study he co-wrote at the IMF that concluded foreign aid didn't help developing countries grow. Mr. Rajan says the twin controversies didn't deter him. At the IMF, he pushed the research department to focus on financial-sector issues, and continued to sound alarm bells about financial-market risks.
By summer 2007, as the crisis began unfolding in earnest, Fed bank presidents Janet Yellen and Gary Stern were citing Mr. Rajan's critiques in their speeches.
Once a pariah, he became an expert others cited. Witness:
Mr. Rajan also urges other safeguards. Along with Chicago colleagues Anil Kashyap and Harvard economist Jeremy Stein, he's come up with a plan to create a form of financial-catastrophe insurance that firms would buy into.
Who would write the insurance? And could that entity withstand a calamity?
When he presented the insurance idea at last year's Jackson Hole confab, the reaction was different than back in 2005. Finnish central-bank governor Erkki Liikanen, recalling the weaknesses Mr. Rajan had spotted in the system back then, said: "I don't dare criticize you. That is all."