In the past, foreign shocks to emerging economies (EMEs) spread out mainly through the trade channel, and transmissions to local economies took time to come into effect. This could certainly be considered a by- product of the international financial setting designed at the Bretton Woods Conference, where capital flows remained mostly local. As sovereign states benefited from more policy room, they were less constrained when fixing monetary and fiscal policies. The availability of policy options did not shield them, however, from macroeconomic instability and recurrent gaps on both the external and the fiscal front, and particularly affecting (by the time categorized as) developing Latin American and Asian economies. Yet this relatively harmonious world was predestined to alter, as cross- border flows began to erupt in the late 1960s, pushing local financial markets towards unchartered waters. Thus, we can trace the origins of the 2008 global turmoil to the collapse of the Bretton Woods system in the early 1970s, when leading developed nations agreed to a progressive dismantling of the former controls on capital flows and when the banks’ transnationalization journey began. Overflowing with liquidity, thanks to large, readily available deposits (Eurodollars) and strongly rising petroleum prices (petrodollars), US (basically) transnational banks set out to find new clients everywhere – including those living in distant and less developed countries. A new era for global banks began. Small (and now open) economies were suddenly at the mercy of the constraints imposed by the so- called monetary trilemma.

The shift towards free markets was accelerated after Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States came to power in 1979 and 1980 respectively. The dominant (neo- liberal) view perceived increased financial activity as beneficial for development, and Keynesian– Myskian caveats were suddenly set aside by policymakers and disregarded by mainstream economists around the world. By the same token, the efficient market hypothesis gained space and substituted Keynes's beauty contest parabola in trying to explain how financial markets actually behave. That was the central message that emanated from international financial institutions (IFIs) through the instructions and the recommendations laid out by the Washington Consensus. From then on, developing countries were urged to liberalize their capital account and deregulate their financial sector.