Hong Kong's International Financial Centre: Retrospect and Prospect

First, governments across the advanced economies remain committed to concentrating the
mission of the central bank on monetary stability, that is, to avoiding excessive inflation or
deflation. Although central banks need deep knowledge of how banks and now bank-like
institutions react to changes in monetary policies, there are other social values embedded in
financial markets. Central bank dogma aside, although the monetary stability mandate may need
to be protected from everyday political pressures, it is nowhere viewed as always deserving of
the first place in the ranking of a given society’s ordered preferences. For this very reason, wise
central bankers have long understood that accretions to their monetary mission bring with them
political complications. In 2008, for example, the leaders of the Federal Reserve clearly
understood that everything they did to stabilize financial intermediaries in crisis would come
back to haunt them, and potentially to undercut the degree of political independence they need to
maintain a sound monetary policy in the long run. They therefore insisted that Congress be
asked to authorize, and the US Treasury to complement, its direct or indirect injections of
liquidity into banks, bank holding companies, and insurance companies. And when it became
necessary to buy the equity of some of those firms, Fed leaders were only too happy to stand in
the shadow behind the Treasury Secretary.
The second conclusion not changed by the crisis of 2008 or by the crises that preceded it
relates to the basic interests of fiscal authorities like the one represented by that same Treasury
Secretary. In modern democracies, the ultimate fiscal authority is typically shared by the
legislature and the executive. With the possible exception of times of war, when that authority
has to be used their overriding objective is to solve the immediate problem facing them but also
to limit claims on the public purse. Bailouts are financially and politically costly, and they are
accountable for those costs. Moreover, if expectations of bailouts become built into markets,
moral hazards become engrained and proper risk management by the private sector becomes
impossible. In extreme but imaginable circumstances, the private capital-markets based system
becomes corrupted and crisis-prone.
Across countries and across regions, both conclusions continue to push financial regulatory
and supervisory reform efforts toward what might plausibly be called the messy middle. In any
given political context, the policy space for financial regulatory and supervisory reform may
expand, contract, or shift. But there remain excellent reasons not to place too much power or
responsibility in central banks and equally excellent reasons to keep the ultimate fiscal authority
of governments disciplined, separated from financial regulation and supervision, and reserved for
emergencies. The task now is to assess current developments in Hong Kong in light of that
logic.
Planning for the future
Even the casual observer cannot fail to be impressed by the Hong Kong Monetary
Authority and the quality of its staff. A uniquely complicated set of circumstances set the stage
for its establishment, including most obviously the adoption of the linked exchange rate system
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