Overholt, William H

Abstract
The central phenomenon underlying the global financial crisis is a combination of financial globalization and national monetary policy. The surge of liquidity and the management problem it creates are global, but each country manages as if it were an island. Throughout the globe, leaders have refused to face the likelihood that financial globalization is inherently unmanageable by sovereign central banks and economic managers acting independently or with inherently limited G-8 or G-20 coordination.
Western politicians have sought to blame the Chinese currency regime for global imbalances—a position that is untenable on the evidence. Chinese politicians have consistently denied that China contributed to the crisis while distinguished Chinese scholars have even claimed that U.S. management of the dollar has been responsible not just for the current financial crisis but also for the earlier Mexican (1994), Russian (1998), and Asian (1997—1998) crises—a position that is even more untenable.
Western leaders have focused their domestic efforts on bank regulation, credit rating agency reforms, inclusion of non-bank financial firms under banking regulations, and the like—all of which are worthy efforts, but ultimately ignore the much larger problem of damping and managing global financial tsunamis and the resultant bubbles. Addressing the big problem squarely would require major sacrifices of sovereignty, in a move toward some kind of global currency (as Keynes recommended in 1944 during the negotiations that led instead to the Bretton Woods system) or global central bank or both.
Will China or any major Western country be willing to contemplate such a sacrifice? It seems unlikely. As a result, future historians may write that this stance ensured that the next crisis will be bigger than the current one.
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