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.

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.