##ane rocket science and financial alchemy in the financial sector, almost entirely for its own sake to almost complete exclusion of the needs of the real sector, created a massive “ financial sector – real sector imbalance ” which, being, intrinsically unsustainable, culminated eventually into the now - all - too - familiar apocalyptic denouement. 3. significantly, the above pre - 2007 story of massive and unprecedented current account imbalances was almost replicated in the current on - going eurozone crisis with large and persistent current account imbalances between the core, proxied by germany, and the netherlands, and the crisis - hit periphery, with the surpluses of the core being almost mirror image of the current account deficits of the periphery. indeed, it is noteworthy that current account surpluses of the core increased dramatically after the launch of the single currency because of significant depreciation of the real exchange rate in the core and appreciation of the real exchange rate in the periphery. such large, and persistent, current account imbalances between the core and the periphery would not have been possible but for the explicit moral hazard of fixed and stable exchange rates created by the single currency because the respective national currencies of the periphery would have depreciated in real terms resulting in timely automatic rebalancing of the current account imbalances! incidentally, but significantly, these current account imbalances between the “ core ” and the “ periphery ” are, to an extent, the result of post - 1999 fiscal convergence to fiscal divergence story in the eurozone for, unless, net private savings offset it, fiscal deficit typically tends to spill over into current account deficit and, therefore, post - euro launch, there ought to have been a credible, effective and functioning institutional enforcement mechanism to ensure ongoing compliance on maastricht fiscal parameters. of course, this post - 1999 fiscal convergence to fiscal divergence story in the “ periphery ” would not have mattered if, like in the case of japan, net private savings more than offset the comparable net public dissaving ( fiscal deficit ) of – 9. 5 %! so the way out of the current crisis is unwinding these imbalances through higher productivity and competitiveness in the periphery relative to the core. this is exactly what happened post - crisis in the case of unwinding of the imbalances between china, on the one hand, and the united states, on the other, with the

came much later only recently – was when donald kohn, former vice chairman of the us federal reserve apologized by saying, “ the cops were not on the beat, resulting in the worst economic recession and loss of millions of jobs ”! at the end of the day, the problem is not not knowing the problem, but knowing it and dithering, agonizing over choices, temporizing, procrastinating and doing nothing credible, timely, tangible and decisive about it. in other words, in my considered opinion, we don ’ t really have to rethink capitalism and globalisation, for paraphrasing john ruskin, what finally matters is not knowing what must be done but actually doing what must be done and doing it when it must be done!! 2. the cataclysmic financial crisis has thrown into sharp relief, as never before, the critical and important role of “ asset price ” inflation / asset bubbles also, as opposed to that of shop floor / products / services inflation alone, as a key variable, in monetary policy response. for what happened was unprecedented in that with monetary policy focused only on traditional cpi, interest rates were kept low in spite of exploding prices of assets like real estate / property, credit assets, equity and commodities. and this was all made possible because of the huge pre - crisis current account surpluses in china and other emerging market economies ( emes ), and huge private capital inflows into emes in excess of their current account deficits, getting recycled back as official capital flows into government bonds of reserve currency countries, especially the usa, resulting in compression of long term yields which, in turn, translated into lower long term interest rates even for the riskier asset classes mentioned above. this chasing of yield, due to global savings glut, in turn, led to a veritable credit bubble, characterized by unprecedented underpricing of risk as reflected in the all - time - low risk premia with junk bonds spreads becoming indistinguishable from bis central bankers ’ speeches investment grade debt! such a low interest rate environment coupled with luxuriant supply of liquidity, created enabling environment for excessive leverage and risk taking. this financial syndrome was a classical case of “ too much ” and “ too little ” – too much liquidity, too much leverage, too much complex financial engineering, too little return for risk, too little understanding of risks ”. this syndrome of too much of arc