Economic crises such as the one affecting Asia could be mitigated if a big lender steps in and provides unlimited liquidity, according to David Marshall of the Federal Reserve Bank of Chicago. The 1995 Mexican peso crisis was averted when the United States lent the government $28 billion, he writes. No private lender was willing to extend a similar amount of credit, because Mexico had only $10 billion in dollar reserves, he says. Yet the large loan stabilized the economy and benefited all investors, he writes.
The Asia crisis has continued because there is not a large lender willing to step in as the U.S. government did with Mexico, he writes. To help with future crises, countries could create an international lender of last resort that could step in and provide unlimited liquidity during times of panic, he writes. This lender would require regulatory authority to set capital levels for borrowers from the fund, he notes.