Hi Christine,
I have not read all of the responses but I know the cultural differences were mentioned. I honestly believe that's what's going on. I'm not an expert on the subject, but when I googled "grandparents role in Hispanic culture" to learn more, it became apparent that it is extremely different than western culture. I truly believe you are misunderstanding each other and the language barrier plays a role as well. I completely understand your feelings and I would be just as angry and hurt, but when you take a step back and explore the motivations behind her actions, you can begin to realize it's really not personal. That's the biggest mistake humans make, myself included, is taking things personally. It's natural to react that way so I'm seriously not criticizing you. Your MIL is taking your actions just as personal which creates the tension in the air. The hardest thing for me to learn in my life (I'm 41 now) was that people act as they see the world based on their own experiences. As humans, we often make assumptions about others' behavior but if you really dissect it and get to the bottom of the reasoning behind it, you'll discover a world of information. It's cliche, but understanding where each party is coming from (she needs to do this too) is the key to making a better respectful relationship.
I'm not saying it's easy and in fact your MIL will probably be more stubborn about it not only because of the culture but because of the generation. The other key to accomplishing this is to get your husband on board since he will be the one talking to her. It's like being a diplomat - the best way to get what you want from someone is to understand them and let them know you understand. For example, saying to your MIL something like "I was thinking about then tension between us and I know I was angry about the clothes, shoes, and hair, but after analyzing the situation, I came to the conclusion that I misunderstood your motives. I know your intentions were not to hurt us, and it's very important to you to be involved in the upbringing of the grandchildren." Giving her this "understanding" alone will make a difference - I'm guessing she'll cry in delight. It's not giving in to her and you still need to set the boundaries for what is best for you and your husband and your children (that is your priority). I'm not suggesting to be OK or accept anything she wants. Like any opposing team, you have to find a way to make it work somewhere in the middle. You'll find that if you take the initiative to do this, most reasonable people will follow. Once they feel understood, they will be more willing to compromise.
After giving the understanding, you then need to clearly set the boundaries and explain what, why, where, when... For example tell her directly that you don't want the baby's hair cut again anytime soon, but when the time comes, you promise to include her in the event - if you don't want her to be the one to cut, maybe she can come with you to the salon and take photos. Make her feel important. You don't have to do this with every event - some need to just be private for mom and dad. It should be a healthy balance. As for the clothes/shoes, maybe there could be a handful of clothes that stay at "Grandma's" or "Abuela's" (not sure what they call her) that she can buy for when the child visits. If it makes her feel important, why not. But I do agree that she should not take or hide or get rid of any clothes/shoes you buy. Tell her that's the compromise. If she does not respect your boundaries, obviously this new method will not work.
My philosophy on child rearing is to not only let children know what is right and wrong, but to give them the tools they need to handle anger, disappointment, etc. e.g. In addition to teaching that hitting is not an appropriate way to communicate to someone when you are mad, give the child suggestions on how to express their anger like punching a pillow, then talking about it. This confirms their feelings are real but teaches them the outlet. I hold the same philosophy on dealing with opposition between adults - each party wants to feel understood. It's hard, I know. My life is not perfect and I definitely have MIL issues, though different kinds. I just want to share some insight in case it helps to make the situation a little easier.
As a last resort, if none of that works, just remember as someone else mentioned, ultimately you cannot control how someone behaves, but you can control how you react, and reacting negatively only hurts yourself and actually feeds into the behavior of the opposition; don't engage it. Once you've tried to understand her and compromise, if she won't budge, then you just have to clearly set the boundaries, not let her be with the children alone, and back off as much as possible. At the same time, don't waste your time being upset, talking about it over and over, feeling attacked, etc. Just be comforted in your decision to draw the line and live your life and don't worry (your husband mostly) what she thinks or feels about it otherwise the guilt trips will get to you. Know in your heart that you really tried to work with her and it's her loss, oh well (this is accepting it at face value). But hopefully it won't get to that. I sincerely hope this helps. Hang in there and I wish you all the best. p.s. by "understanding" someone I don't mean you have to agree with them! K.