Over the past decade emerging markets accumulated foreign currency reserves to insure against the risks of global financial integration. They were wise to do so. Countries with large reserves have fared better in the crisis of 2008/09. Yet collectively reserve accumulation had unintended consequences. It has contributed to the build-up of global imbalances and financial distortions that helped create the macroeconomic backdrop for the crisis. This article looks at recent patterns of global capital flows from the perspective of economic history, trying to set events in a longer term perspective. It argues that the crisis could mark the end of the latest attempt to manage the financial stability risks of capital market integration. Emerging markets will not consent to facing global financial flows without large foreign currency reserves, but a return to currency interventions and reserve accumulation would be equally problematic. Historically, the ups and downs of global capital market integration have been driven by varying assessments of the benefits of capital mobility. With the recent crisis the time for such a reassessment might have come.
