What is wrong with the islands?

Paul Krugman writes:

Let me make a broader point: we’ve now seen three island nations around Europe become huge international banking hubs relative to their GDPs, then get into crisis because their domestic economies don’t have the resources to bail out those metastasized banking systems if something goes wrong. This strongly suggests, to me at least, that we have a fundamental problem with the whole architecture (to use the preferred fancy word) of international finance.

…All of which raises the question, is the era of free capital movement just a bubble, fated to end one of these years, maybe soon?

Of course there is more at the link.  The way I put this point is to suggest that the era of reliable deposit insurance may be coming to a close (and not for the better).  What kind of international capital regulations would or could limit this problem is a topic deserving of much more attention.  We can’t go back to Bretton Woods, numerous companies and developing economies already rely on international capital flows, and so what is actually on the table here?


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