Is there any difference between these, asks my latest column for Project Syndicate. All three provide private benefits (sometimes), but can cause havoc for the rest of us. Why do we approach regulation in each area so differently? (And how does Mark Thoma beat me to it every time, even when it is my own piece?)
Meanwhile, Carmen Reinhart and Ken Rogoff's new paper (summary here) makes the obvious but important point that financial globalization and financial crises are related. In their words, "Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically." Here is the picture that is words a thousand words.
Now what is important about this conclusion is that it runs counter to a growing piece of conventional wisdom in the academic literature, namely that there is no relationship between propensity to financial crisis and openness to foreign capital flows. Rogoff himself (with co-authors) wrote in an earlier survey: "In sum, there is little formal empirical evidence to support the oft-cited claims that financial globalization in and of itself is responsible for the spate of financial crises that the world has seen over the last three decades."
I think the difference may be between cross-sectional and historical evidence: the latter shows a close correlation, but this does not mean (perhaps) that the countries that experience the most crises during periods of high capital mobility are necessarily those that are financially the most open. In any case, I find this a case of reason restored.
UPDATE: Carmen Reinhart writes to clarify her views:
In 1999, Graciela [Kaminsky] and I wrote in our twin crisis paper:
"Our results also yield an insight as to the links of crises with financial liberalization (Table 3). In 18 of the 26 banking crises studied here, the financial sector had been liberalized during the preceding five years, usually less. Only in a few cases in our sample countries, such as the early liberalization efforts of Brazil in 1975 and Mexico in 1974, was the liberalization not followed by financial sector stress. In the 1980s and 1990s most liberalization episodes have been associated with financial crises of varying severity. Only in a handful of countries (for instance, Canada which is not in the sample) did financial sector liberalization proceed smoothly. Indeed, the probability of a banking crisis (beginning) conditional on financial liberalization having taken place is higher than the unconditional probability of a banking crisis."
And to be clear, Rogoff's co-authors in the survey piece I referred to were Ayhan Kose, Eswar Prasad, and Shang-Jin Wei.