The Financial Crisis As An Imbalance In Capital Flows

John B. Taylor explains the persistence of the financial crisis as an imbalance in capital flows:

The Fed’s current near-zero interest rate policy, designed to stimulate the U.S. economy, has made it harder for other central banks to combat credit and asset price booms. A group of 18 emerging market central banks—including Brazil, China, India, Mexico and Turkey—held their interest rates on average as much as five percentage points below widely used policy benchmarks—and global commodity prices doubled from 2009 to 2011, a boom rivaling the excesses leading up to the 2008 financial crisis. This global, loose monetary policy was likely a big factor pushing up commodity prices. The current sharp slowdown in most emerging markets coincides with an inevitable bust of this easy-money induced boom, and the decline of foreign demand for American goods is now feeding back to the U.S. economy.

The Fed needs to pay closer attention to global capital flows and the reactions of other central banks to its decision to set interest rates very low for long periods of time. This does not mean taking one’s eye off the U.S. economy, but rather preventing booms and busts abroad from slowing growth at home precisely when we need it most.

I think he’s right but he doesn’t go back far enough. Is it really just a coincidence that the U. S. housing bubble began to take off in 1994 when China sharply tightened its peg to the dollar and that the bubble began to collapse in 2005 when it relaxed the peg?