ABSTRACT
The 2007-09 financial crisis underscored the inherent fragility of the international financial system and its regulatory structure. Having originated in the United States-the country that enjoys the most advanced financial markets, and is also at the centre of the international monetary system-the crisis was preceded by a bubble in the housing and share markets, fuelled by an expansive monetary policy (Fratianni 2008). In its wake a consensus developed that the financial regulatory structure needed a significant overhaul. Much less attention was given to the instability of the dollar-based international monetary system and its potential to spark another severe crisis. The fact that the financial tsunami did not instigate a confidence crisis in the U.S. dollar fed optimism that the financial crisis might be resolved without substantive changes in the existing international monetary regime. Ben Bernanke (2007) reaffirmed the thesis of a global saving glut. This thesis has two important implications: the first is that the large U.S. external imbalances were largely a temporary phenomenon, rather than structural, and thus would find a natural solution in time; the second is that the onus of the adjustment problem fell on the periphery rather than on the centre country of the dollar-based international monetary system.
