Optimists already see a stabilization of the situation and light at the end of the tunnel, and they may well be right. But deepening recession in Japan, emerging problems in Latin America, and questions about the stability of the U.S. and European markets still raise serious concerns that what began as a regional crisis may swell into a crisis of global proportions. Hong Kong is located at the very heart of the East Asian region, and our economy is intricately, and increasingly, linked with the other economies in the region. It is therefore hardly surprising that we should have experienced some considerable stress as a result of the Asian crisis. Over the last year we have seen a roughly 50% decline in the value of property and stocks, a rise in unemployment, and a forecast contraction of 4% in our GDP for 1998. Although the stock market and property prices have seen something of a rebound during the last month, the pain of what has become an extensive economic adjustment continues, and is likely to continue for some time. It is necessary to stress, however, that this is an adjustment, not a collapse, and that it has been one of the least dramatic, and least traumatic, of all the upheavals in the region. In US dollar terms, the Hang Seng Index has, since the crisis erupted last July, seen the smallest decline of any stock market in the region. Our banking system has remained stable and solvent.
BIS central bankers’ speeches  5  There are a couple of other difficulties related to the use of national policies. The shock absorbing capacity of fiscal policy is in too many instances limited by the narrow fiscal space existing before the crises. The recession has further eroded fiscal positions and fiscal rules have failed to tame unsustainable fiscal paths so that the ability of fiscal policies in the EU to deal with another blow of crises is quite limited. Also, a need for national macroprudential policy immediately opens the issues of harmonisation and coordination on the international level in order to avoid unintended consequences, which I will comment in more detail later on. Additionally, for macroprudential policy to be effective it must be intrusive, affecting the “normal behaviour” of agents and markets 19, yielding benefits in reducing long-term costs generated by the systemic risk that makes it hard to attenuate public interest thus creating a central bank’s legitimacy paradox 20. Unconventional expansionary monetary policy, which was pursued after reaching the zero lower bound, and out of the fear of “the risk of doing nothing” 21, may be risk-inducing by fuelling search for yield behaviour. Abundant liquidity and low borrowing costs have the capacity to generate bubbles, confirming a notion that rational individual decisions may lead to irrational social outcomes – albeit as a reaction to highly non-conventional policies.