Authorities around the world are trying their best to ensure that financial intermediation continues.
With the financial systems of many jurisdictions, including the United States and parts of Europe, not performing their fundamental function of financial intermediation properly, the rate of global economic expansion is set to slow down sharply. The risk of a global recession is in fact increasing, as credit tightness and economic slowdown reinforce each other and a spiral develops. The tasks at hand for authorities in these jurisdictions are clearly to get their financial systems to function again and, in the meantime, to limit the damage inflicted on their economies by the financial stress.
Decisive actions are being taken on various fronts, many of them unprecedented in size and nature. There are the more traditional measures on the fiscal front, with many countries implementing or contemplating historically large fiscal-stimulus packages. On the monetary front, there has been aggressive easing, with the injection of large amounts of liquidity into the banking system and large cuts in interest rates to increase the availability and lower the price of money for borrowers and encourage consumption. There are also many other specific measures to assist different economic sectors to overcome the difficulties that they face over this very stressful period, most notably those targeted at the financial systems.
Interestingly, there is much less concern now than before over the moral hazard associated with government intervention in financial markets or government assistance to financial institutions. Indeed, when faced with the real prospect of a complete meltdown of the financial system, there really is no choice for the authorities but to intervene and do so decisively. But it takes time for the community to accept this, particularly for jurisdictions that have thrived under a capitalist, free-market development model: and in the possibly lengthy process of gaining the necessary acceptance, the situation might, regrettably, have to be allowed to deteriorate before political acceptance is forthcoming. In my opinion, this has probably been the case in the United States. There was a political outcry against the rescue of one investment bank in March. However, when another investment bank collapsed in September, leading to a sharp deterioration of the crisis, people became more accepting of the need to intervene more extensively and decisively. Such is political reality. It is, of course, meaningless now to talk about what otherwise would have happened. But it is clear that untimely or inappropriate action by the authorities in dealing with a financial crisis can be very costly.
Let us all hope that the unprecedented measures taken in the United States to get its financial system functioning properly again will work, and quickly, so that a deep global recession can be prevented from developing. I am glad, of course, to see that decisive actions are being taken on the Mainland to sustain economic growth and encourage domestic consumption. At least that would provide some cushioning effect for the economic slowdown that we will inevitably see here in Hong Kong in the months to come. Being a highly externally oriented economy, Hong Kong is likely to be affected by any sharp economic slowdown in our trading partners to a greater extent than a less externally oriented economy.
In the meantime, we will do all that we can to ensure that the financial system of Hong Kong, particularly the banking system, continues to perform the crucial role of financial intermediation necessary to sustain economic activity. Borrowers have been voicing considerable concern over the disruption in the flow of credit, particularly new credit, since early October, as the global financial crisis has deepened quickly. The October banking statistics coming in provide some early evidence on this. The total amount of bank loans for use in Hong Kong looks to have stopped increasing after having done so consistently every month since the beginning of the year. We are monitoring the situation very closely, requesting more frequent statistics from banks.
Joseph Yam
4 December 2008
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