But if, when all other measures are taken to improve transparency and disclosure, these international capital flows remain flighty and volatile, even those who are searching for market purity will have to either accept restrictions on such flows, or the existence of some lender-of-last-resort.
The damaging externalities of the reversal of these capital flows cannot simply be left to run their course, with markets “sorting it out” in the way we are observing currently in Asia. No-one has yet come up with any clever ideas on how to back up the international lender-of-last-resort by prudential rules to address the moral hazard problem.