It must be doubtful if these very large depreciations are necessary for correcting the imbalances in these economies. There are economic and financial problems that needed to be put right, but the plunge in their currencies and asset markets seems excessive. I believe the people of Hong Kong realize this. They realize that the implications for Hong Kong of a break in the linked exchange rate system are clearly a lot worse than the rather short term pain that they have had to bear and which is now hopefully easing. By contrast, the pain of economic adjustment that some of the Asian economies have to go through is much greater, is now only beginning to be felt and likely to last for some time. 29. I believe, however, that the ability of the Hong Kong economy to tolerate the pain of adjustment could be enhanced, thereby further strengthening the robustness of the currency board arrangement. First, the risk of interest rate volatility, particularly for the innocent parties, could be alleviated by the promotion of fixed rate borrowing as a matter of consumers’ choice. Clearly those on fixed rate mortgages would not be affected by hikes in short term interest rates. There is hitherto a lack of long term fixed rate funding for banks and so mortgages are predominantly arranged at floating rates. Here the newly formed Hong Kong Mortgage Corporation does have an important role to play.
At the end of the day, out of turmoil, we all come out with new ideas, new concepts and new lessons to be learned and followed. Or, to be more illuminating let me quote Christopher Adam and David Vines – Oxford University: “… The Great Depression led Keynes to write his General Theory, thereby creating macroeconomics as a basis for national macroeconomic policy-making. The Second World War led – via the Bretton Woods Conference – to the creation of international macroeconomics, and to the birth of the IMF… The present global financial crisis will, we think, most likely lead to a major shift in our understanding of the role of finance in macroeconomics, in both theory and in policy-making”. The recent global economic and financial crisis indeed created a room for upgrade of what we knew or what we thought we knew. It clearly illustrated how fragile our knowledge can be emphasizing the need for a continuous capacity building. Bearing all these in mind, one cannot be oblivious to the role which the training centers, such as the CEF, do have in building the architecture of knowledge. In fact, the global crisis accentuated even more their importance. They embrace and combine the latest theoretical and practical views, trying to spread the new ideas and help policymakers deliver optimal policy responses. The CEF has proved to be a leading institution in helping policy makers to improve institutional capacities.