ABSTRACT
In the aftermath of the Asian financial crisis, many emerging economies, including China, decided to pursue exchange rate, monetary, and other policies that generated large current account surpluses. Three important capital exporting regions emerged: China and other emerging East Asian economies; the oil exporters; and some old industrial countries, particularly Germany and Japan. The economics establishment failed to understand how the economy worked, at macroeconomic level. Because it failed to understand financial risk, and it failed to understand financial risk because it failed to understand how economy worked at macroeconomic level. The work of economists who did understand these sources of fragility was ignored because it did not fit into an imaginary world of rational agents that the professors Pangloss had made up. In what follows, the author intends to address four questions: Where are we? How did we get here? What are the global implications? What are the implications for emerging economies? Financial crises are either fiscal or private?.
