The rise of private-sector liquidity as a dominant component in global liquidity markets has created a penetrating web of financial interdependence that links the fates of investors, financial institutions and national governments to one another. The booms and busts of the last thirty years provide vivid evidence that the behavior of each of these actors can generate uncertainties that affect capital flows, credit dynamics and price levels, all of which have potentially significant social, economic and political consequences. The dynamics are ongoing. The newly released International Monetary Fund (IMF) World Economic Outlook celebrates a broad-based global recovery, but it also warns that the postcrisis economic expansion has not been balanced and may have peaked in several major economies.

Europe’s journey toward the ideal of ever-denser integration, peace and prosperity has been buffeted by repeated trials of temptation, frustration and risk. Like Odysseus, who bound himself to the mast of his ship to avoid the seductive songs of the Sirens, political leaders of Europe bound themselves by treaty and fealty to the principle of fiscal discipline in order to protect themselves from the alluring yet fickle flows of global capital. As they discovered, such constraints are neither always effective nor always desirable. Consequently, also like Odysseus, economic policymakers and national politicians continue to employ a wide range of strategies to steer Europe past the twin challenges posed by a modern-day Scylla (i.e., a multiheaded monster of sluggish economic growth, resurgent nationalism and social unrest that threatens to yank politicians out of office and cast countries out of the European Union [EU]) and Charybdis (i.e., a whirlpool of financial capital energized by expansive monetary policy and conditional bailouts that threatens to pull individual countries and perhaps the EU itself underwater).

Like the bittersweet drama of tango dancers performing on Calle Florida for shoppers leaving Buenos Aires’ posh Galerías Pacífico shopping center, Argentina’s political and economic leaders stepped out of Latin America’s sorrowful “lost decade” of the 1980s with a series of dramatic policy changes that led the country through grand successes, devastating failures and postcrisis resurgences. Like the dancers shifting to changes in musical tempo, Argentine presidents and ministers of the economy responded to fluctuations in global markets and domestic politics with dips and twirls, driving forward and occasionally reversing direction with great fanfare. Their moves generated both praise and scorn, winning Argentina the diverse imprimaturs – at different moments in time – of “poster child” of the Washington Consensus, “defaulting pariah” of international bondholders, “vanguard” of Latin American populism and the “victim of vulture investors” that threatened to undermine debt restructuring agreements around the globe.

Speaking before the Senate Banking Committee on July 15, 2008, US Treasury Secretary Henry Paulson petitioned Congress for the authority to use taxpayer funds to prevent America’s mortgage giants Fannie Mae and Freddie Mac from collapsing. The hearing addressed widespread homeowner mortgage defaults that had sent stock prices plummeting and investors fleeing. Paulson argued that if investors came to understand that the government would not allow Fannie and Freddie to go under, stock prices would stabilize and a larger crisis could be averted. In a statement that would be repeated in news stories for years to come, Paulson speculated, “If you have a bazooka in your pocket and people know it, you probably won’t have to use it.” In this instance, the “bazooka theory” failed: Paulson not only had to fire his bazooka shortly after acquiring it, but its blast proved grossly inadequate to calm market uncertainty and forestall what became the worst financial crisis to hit the United States since the Great Depression. In spite of Paulson’s newly acquired money and authority, investors dumped Fannie and Freddie shares, both organizations fell into government conservatorship, political criticisms of bailouts grew louder and the whirlpool of uncertainty swirled ever faster.

With the creation of the Brady Plan – a program developed by US Treasury Secretary Nicholas Brady in 1989 to convert national debt into bonds following the Latin American debt crisis – emerging market countries joined their wealthier cousins as important participants in global bond and equity markets. The subsequent profitability and popularity of emerging market bonds combined with the securitization of other debts (most notably the packaging of mortgages into tradable securities), the creation of a wide range of increasingly sophisticated finance instruments and the normalization of free capital mobility led to a dramatic surge in the growth of private-sector liquidity and sparked the development of the extraordinarily highly interconnected global financial marketplace that we live in today. The resulting globalization of finance has transformed the international financial system from one dominated by official, public sources of capital to one in which private-sector components of liquidity now permeate virtually all facets of the financial system.

In the wake of the recent financial crisis, Federal Reserve Chairman Ben Bernanke argued repeatedly that fostering healthy growth and job creation required legislative action. He warned that continued political battles over fiscal and monetary policy, financial regulation and the debt ceiling were “deeply irresponsible” and would have “catastrophic consequences for the economy that could last for decades.” At the same time, like Alan Greenspan before him, Bernanke joined secretaries of the Treasury and other technocrats in guiding and enabling legislation, helping presidents outmaneuver critics and compensating for political uncertainty when political battles between the President and Congress stalled economic legislation. Far from being apolitical actors, these technocrats manipulated authority, exploited deference from politicians and business leaders, and alternately bolstered and challenged national politicians in order to shape US economic policy, manage market behavior and coordinate global activities before, during and after the recent financial crises.