In early 1995, I characterized the Mexican crisis as the first crisis of this new international financial system. The crisis that started in East Asia more than a year ago, is its second. Since the Mexican crisis, policy makers have been engaged in an accelerated learning process of how this new system works. There are certain elements that are becoming evident. The sensitivity of market responses under the new regime has been underscored by the startling declines of exchange rates of some emerging market economies against the dollar, and most other major currencies, of 50 percent or more in response to what at first appeared to be relatively modest financial difficulties.
Market discipline appears far more draconian and less forgiving than twenty or thirty years ago.
This capital, in times of stress, also flees more readily to securities and markets of unquestioned quality and liquidity. It has taken the longstanding participants in the international financial community many decades to build sophisticated financial and legal infrastructures that buffer shocks. Those infrastructures discourage speculative attacks against a well-entrenched currency because financial systems are robust and are able to withstand vigorous policy responses to such attacks. For the more recent participants in global finance, their institutions, until recently, had not been tested against the rigors of major league pitching, to use a baseball analogy. The situation in many emerging market economies is illustrative.