How the Full Opening of the Capital Account to Highly Liquid Financial Markets Led Latin America to Two and a Half Cycles of ‘Mania, Panic and Crash’ José Gabriel Palma

Latin America has recently experienced three cycles of capital inflows, the first two ending in major financial crises. The author analyses the dynamics of the second cycle — from the 1989 ‘Brady-bonds agreement’ to the Argentinian 2001/2002 crisis (and 9/11). It is argued that these financial crises took place mostly due to factors that were intrinsic to the workings of over-liquid and under-regulated financial markets — and as such, they were both fully deserved and fairly predictable. In short, these crises point not just to major market failures, but to a systemic market failure.

mania_panic_crash (Download the full text in PDF format)