Misaligned exchange rates are more often than not a prelude to trade friction. Yet so far, in spite of sporadic outbreaks of warlike political rhetoric between the US and China, currency misalignments between the world’s surplus savings countries and the world’s borrowers and spenders have not ended in disaster. Buy America provisions and bail-outs for bankrupt motor companies are less damag- ing than trade barriers of the kind erected by the Smoot-Hawley Act in the 1930s. Yet the reality, in this financial crisis, is that we have protectionism by the financial backdoor and may soon have it by the front door too.

Until August 2007 liberalisation in global banking enhanced the efficiency of the financial system and facilitated trade in goods and services along with cross-border movements of capital. The huge advantage of such globalisation was that lenders no longer needed to be physically close to borrowers.