Discussion of “Global Imbalances and the Financial Crisis: Products of Common Causes, by M.Obstfeld and K.Rogoff”

One of the main global economic concerns before the financial crisis was the presence of large“global imbalances,” which refer to the massive and persistent current account deficitsexperienced by the U.S. and financed by the periphery. This concern was intellectuallygrounded on the devastating crises often experienced by emerging market economies that runchronic current account deficits. The main trigger of these crises is the abrupt macroeconomicadjustment needed to deal with a sudden reversal in the net capital inflows that supported theprevious expansion and current account deficits (the so called “sudden stops”). The fear wasthat the U.S. would experience a similar fate, which would unavoidably drag the worldeconomy into a deep recession.As we all know, the crisis eventually came and it came with more force than we all anticipated.However, the mechanism did not at all resemble the feared sudden stop as quite the oppositeoccurred. During the crisis, net capital inflows to the U.S. were a stabilizing rather than adestabilizing force. The U.S. as a whole never experienced, not even remotely, an externalfunding problem.Some pre‐crisis imbalance critics have chosen to ignore the inconvenient fact that theiranticipated mechanism played no role in the crisis, choosing instead to take the credit for therealization of the forecast of doom. One can feel the tension in the current paper: At timesMaury and Ken are tempted to go the self‐gratifying “I told you so” route, but they areintellectually too solid to do so, and hence they pull themselves out of it. Deeply at heart theystill feel that global imbalances did it, but they also know that they need to find a differentmechanism from the conventional sudden stop story if they are to match the facts.