The past year witnessed three of the most dramatic financial collapses since the Third World debt crisis of 1982. The meltdown of the Mexican peso in December 1994, the failure of the 233-year-old Barings Bank last February, and Daiwa Bank's $1 billion loss in November--apparently at the hands of a single trader--would all seem to point to a financial system that has spun out of control.
In June 1974, when the small German Bankhaus Herstatt floundered, the contagious effect was immediate: interest rates rose, the Euromarkets (the London-based markets for dollars and other hard currencies) shriveled, and the integrity of the American payments system was threatened. The 1982 debt crisis led to even greater anxiety about a possible catastrophe, and the payments system was kept in motion only by the injection of huge amounts of cash by the industrial countries and the International Monetary Fund (IMF).
But last year the markets responded to these financial crises with little more than a "ho hum." In fact, the U.S. stock market boomed, and interest rates around the world declined. The Bank of England allowed Barings to fold, and nothing happened. American regulators closed Daiwa Bank's New York office, and the markets did not squeal. Both inside and outside the U.S. government and international organizations, analysts continue to debate whether the Mexican bailout was really necessary.
What explains this sea change in the reaction of international markets to financial shocks? Over the past 20 years the leading economic powers have created a regulatory structure that has permitted the financial markets to continue toward globalization without the threat of systemic collapse. The elimination of financial contagion has required painstaking efforts by dedicated public servants who have had to navigate between domestic political pressures and concerns about the well-being of the international system.
One school of thought, represented by the consultant Keniche Ohmae and the economist Richard O'Brien, views the international economy as supranational, the nation-state as increasingly irrelevant to its healthy operation. But rather than demonstrate how the expansion
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