Johnmy basic thinking on why banks in sulurps countries are dangerous is that the central bank must accumulate assets (loans) to offset liabilities (dollar reserves). So when there are lots of reserves, there are likewise lots of loans. Almost by definition these loans are cheap. Sure, a bunch went to the US - causing the housing bubble - but a whole lot stayed in country. So a reserve boom equates to a lending boom, and firms compete to get returns on capital down to the cost of capital - which is around zero. It's why the chinese housing market now looks like the US housing market in 2006. Then the US curent account deficit shrinks, and global banks deleverage - leading to a fall in reserves. All of a sudden the central bank can't issue new cheap loans, the cost of capital rises, and the emerging market banks customers go bust. And that's why building reserves never works as a solution to a potential market crisis. Julienjgarran@sofaer.com
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