History of recent financial crisis

 In an article on Monday, May 25 2012, we learned that economists, since the financial meltdown of the years 2007 and 2008, are advocating greater attention to economic history. This branch of economics gives lessons which principles of economics sometimes fail to offer.

 The 1995 Mexican crisis was the result of excessive foreign borrowing, a weak or poorly regulated banking system and high inflation rates.

The Mexican currency the peso had been pegged to the US dollar. By late 1994, Mexico had a $17 billion debt deficit. This was six percent of its gross domestic product (GDP). There had been an uncomfortably rapid expansion in public and private sector debts.

Despite the hardship, Mexican officials were issuing press statements which suggested that all was well. Encouraged by these statements, foreigners rushed in with funds for investment in what they thought was a booming economy.

But on closer scrutiny, some currency traders concluded that the peso would be devalued. They began dumping the peso on the foreign exchange market, collecting dollars instead. The government tried to stabilise the value of the peso by buying pesos and selling dollars, but without adequate dollar reserves, the effort could not continue.