Mexico: Policy Failure, Moral Hazard, and Market Solutions

For the third time in the last dozen years, the Mexican economy is in financial distress largely because of bad monetary policies pursued by Mexican officials. The U.S. response in all three instances has been to extend loans from the Federal Reserve and the Treasury. These loans provide a short-term palliative while creating perverse incentives for Mexican officials and foreign investors that ensures the "crisis" will reappear on an even larger scale in the future. In addition, the use of the Treasury's Exchange Stabilization Fund (ESF) and Federal Reserve to fund an administration's foreign venture raises constitutional issues with regard to separation of powers and undermines the principle of central bank independence... Loans from the U.S. and international agencies such as the International Monetary Fund (IMF) can arrest a crisis in the short run, but are counterproductive in the long run