The lessons of the past year for central bank reserve managers – overseers of $7,000bn in foreign exchange assets, four times the amount managed by their flashier cousins, the sovereign wealth funds – stand in stark contrast to the convictions they developed over the prior decade. As central bank forex assets quadrupled in the 10 years following the emerging markets crisis of 1998, reserve liquidity was deemed excessive and more diversified investment strategies compelling. With growing confidence, sovereign assets were shifted away from the US dollar, government bonds and gold to higher-yielding currencies, credit and even equity instruments. The government-sponsored enterprises Fannie Mae and Freddie Mac (and by second derivative, US homeowners) were primary beneficiaries of this trend; central bank holdings of GSE debt grew from about $100bn in 2001 to more than $1,000bn at their peak last year. Commercial banks also swelled with central bank deposits rising from $400bn to $1,400bn over the same period.

In a single, memorable autumn, however, eight years of excess returns by risk assets over government bonds were eviscerated. And rather than drowning in US dollars, central banks the globe over were engulfed by a vicious dollar shortage. To mitigate downward pressures on emerging market and other currencies, the US Federal Reserve was forced to arrange emergency US dollar swap lines with central banks across Europe, Asia and Latin America. Had Korea, Mexico and some developed countries not had this additional dollar liquidity, financial institution failure and massive capital flight in a number of countries could have proved catastrophic.