ABSTRACT
A more realistic perspective is that the public and private sectors generate positive financial feedbacks between themselves-first at the micro and then at the macro level, ultimately destabilizing the system. Tolstoy may well have been right about families, but the extension of his judgment to economies hit by capital market crises distinctly fails. This chapter presents a review of existing crisis theories, and deals with relatively innocuous but important accounting conventions, and goes on to present mainstream models and a more plausible alternative. The first post-World War II wave of developing economy crises in which external financial flows played a significant role took place around 1980. In the finance literature, moral hazard has been picked up in diverse lines of argument. The intermediaries financing such initiatives gained more explicit protection against risky actions by their borrowers through "lender of last resort" interventions on the part of the central bank. .
