ABSTRACT

One question about the recent global fi nancial crisis is how it could have happened. At the time, we were focused on controlling our foreign indebtedness and our fi scal defi cits in order to obviate the factors that had caused the Asian fi nancial crisis of 1997-1998 and the Latin American debt crisis in the early 1980s. This time, however, it was our credits (not debts) and investments abroad that had an immediate adverse impact, which became much deeper as export markets contracted as a result of asset losses in importing countries. As a side effect of increased global fi nancial integration, cross-border interaction among fi nancial markets had increased. Because the size of the market had increased tremendously, volatility was much more intense, and what would previously have been minor fl uctuations had become larger than individual countries could absorb or mitigate on their own. While prudential structures were designed, the exact form of vulnerability had not been fully specifi ed, so preventive mechanisms were diffi cult to devise.