Norman T L Chan: Can central banks save the world? Keynote address by Mr Norman T L Chan, Chief Executive of the Hong Kong Monetary Authority, at the 19th Annual Hong Kong Business Summit Luncheon, Hong Kong, 25 November 2013. *  *  *  C K (Chow), Stephen (Yiu), distinguished guests, ladies and gentlemen, good afternoon. 1. It has been five years since the onset of the Global Financial Crisis in 2008. The Crisis – followed three years later by the European Sovereign Debt Crisis – exposed the weaknesses of the global financial system and the vulnerabilities of the global economy. Today, peripheral countries in Europe are suffering a sharp contraction in their economies, and major advanced economies are experiencing very weak growth, if any at all. The economic output of several European countries, including the UK and France, is still below the levels prior to the Global Financial Crisis. The US, which seems to be the only bright spot among the advanced economies, still hasn’t recovered in full the 8.7 million jobs it lost following the Crisis. 2. Confronted by this extremely difficult environment, it was not surprising that central banks in the advanced economies began taking unprecedented steps to lower interest rates as far as possible. And, once the rates hit rock bottom, they began introducing different forms of very aggressive quantitative or credit easing.
4  Ladies and gentlemen, before moving on to what lies ahead, let me briefly summarise my key message – excessive leverage is the root cause of the global financial crisis, but surprisingly, not much has changed. Many have still not learnt the lesson, and think the problems can be solved by further leveraging. And policymakers advocating extremely accommodative monetary easing still believe liquidity-driven growth is the answer. Indeed, it’s ironic that low interest rates, mispricing of risk and excessive debt levels, which contributed to the crisis in the first place, are now considered the “solution”. BIS central bankers’ speeches  What lies ahead? 14. So, we have now entered “uncharted waters” or the “world of the unknown”. It has often been argued that the Global Financial Crisis was unprecedented and one which demanded unprecedented policy action. As most of the advanced economies have very little, if any, fiscal headroom to support growth and job creation, the use of zero interest rates and QE, and leveraging on central banks’ seemingly limitless ability to expand their balance sheets, appears to be “The Only Game in Town”. Presumably, this means the situation has become so bad, we may as well try these unconventional policies to see if they work. However, as I outlined earlier, the efficacy or potency of these policies has not been as strong as first thought. In the US, the pace of economic recovery has been rather moderate, if not disappointing, despite the unprecedented fiscal and monetary support packages launched since 2009.