Global Investor: Too Wealthy For Worries; Unless the lessons of history are irrelevant, it's a fantasy to think that markets can police themselves.

Byline: Jeffrey E. Garten (Garten is the Juan Trippe professor of international trade and finance at the Yale School of Management.)

Emotions ran high at last week's meeting of G-7 finance ministers in Essen, Germany. Euro-zone officials were annoyed with their Japanese counterparts because the yen had sunk to all-time lows against the euro, signaling trouble for the Continent's exporters. Tokyo sniped that the euro was buoyed mainly by European Central Bank interest rate rises. U.S. Treasury Secretary Hank Paulson pooh-poohed Europe's charges against Japan, attributing the weak yen to market forces. But Paulson then pointed a finger at Beijing for not revaluing fast enough. In other words, everyone was mad at everyone else.

You would have thought that Wall Street, the City of London, and other financial centers would have paid more attention to the fireworks. After all, currency tensions can be an early warning of broader troubles. In the late 1980s, for example, squabbling among the United States, Japan and Germany over the relative values of the dollar, yen and D-mark was a precursor to the 1987 global stock-market crash. Could it be that today's financiers and traders, enjoying several uninterrupted years without a crisis, have grown complacent?

I think it's something else--namely the fact that markets have become so much bigger and more powerful than governments. According to a recent McKinsey study, in 1980 the size of the global capital market was about equal to global GDP. By 2005, the market had grown to roughly three times world GDP, or $140 trillion, and within three years from now it is expected to grow to $228 trillion. Looked at another way, the size of the global capital market is about 70 times the combined foreign exchange reserves of China and Japan, by far the world's two largest holders. Moreover, there has been a dramatic increase these past few years in virtually every asset class including stocks and bonds, foreign exchange, foreign investment, derivatives, private equity and hedge funds.

There's another reason that Wall Street doesn't take government pronouncements seriously: the disconnect between words and actions. The markets know that when public officials bicker over exchange rates, it's just hot air unless treasuries and central banks intervene to prop up or push down currencies. Likewise, when the politicians bang on about the dangers of long-term financial imbalances, it means nothing to traders unless it's followed by legislation to ...