1. All Crises are the Same

A financial crisis is a disturbance to financial markets that disrupts the market’s capacity to allocate capital – financial intermediation and hence investment come to a halt. Investors should take risks, and risks mean that some proportion of investments will fail. This is why we have domestic bankruptcy laws that provide for orderly workouts when investments and the firms that made them do fail. Similarly, if the international capital markets are functioning well, mistakes will be made. Then one or another country (or its private sector borrowers) will fail: a crisis. History records many. We should not expect or even wish to prevent them all. That would be at the cost of insufficient, excessively risk-averse investment. So such crises will always recur- but capital markets forget The term ‘financial crisis ’ is used too loosely, often to denote either a banking crisis, or a debt crisis, or a foreign exchange market crisis. It is perhaps preferable to invoke it only for the ‘big one’: a generalized, international financial crisis. This is a nexus of foreign exchange market disturbances, debt defaults (sovereign or private), and banking system failures: a triple crisis, in which the interactions are the key to causality, depth, and persistence (Eichengreen an