Must-Read: Wolfgang Münchau: Free Capital Flows Can Put Economies in a Bind: “We might now ask whether the removal of the policy instrument of capital controls may have contributed to a succession of financial crises…

…In the good times, Prof Rey finds, credit flows into emerging markets where it fuels local asset price bubbles. When, years later, liquidity dries up and the hot money returns to safe havens in North America and Europe, the country is left in a mess. There is very little the central bank can do to moderate inflows and outflows of foreign money. Unless you accept financial instability as inevitable, then, you may soon be thinking about imposing capital controls of a particularly stubborn variety–the kind that involves telling foreign investors you do not want their cash. The point is to prevent hot money flowing in during the good times, and to stop it from draining out in the bad times. This is not yet a subject of polite conversation among policymakers. Central bankers have instead been peddling a concept known as macroprudential regulation, a cuddly version of capital controls…