Global Financial Crisis
The Global Financial Crisis of 2007-2008 was widely blamed on the subprime crisis and its fallout, which led to the collapse of Lehman Brothers in 2008, with the US government forced to bail out AIG, and to rescue both General Motors and Chrysler, while also adding liquidity to avert a severe credit crunch in the banking sector. Banks in Europe, the US and Britain also came under extreme pressure and the GFC contributed to the euro zone sovereign debt crisis.
The moral hazards of intervening in the market
Things have never been the same in the financial world since the 2008-09 global crisis, but globally governments and bureaucrats are still trying to reshape them so that it does not happen again. In Hong Kong the government proposes to adopt powers of market intervention that not long ago would have been anathema to our free-wheeling economy. This would bring the city into line with rules brought in by the Financial Stability Board established by the Group of 20 industrialised countries after the avalanche of defaults that froze credit markets during the crisis.
The FSB, on which the city is represented by the Hong Kong Monetary Authority, was set up to co-ordinate the work of national regulators and international regulatory benchmarks in the interest of financial stability.
Under this regime, all major markets are required to empower regulators to intervene quickly in failing financial firms to try to avoid having to resort to the use of taxpayers' money to bail them out. Otherwise, speculators tend to take risks without fear of bearing loss, an example of moral hazard.
As a result, the government has launched a consultation that proposes a series of draconian steps under a framework for rapid intervention to ensure shareholders and creditors foot the bill, including blocking asset transfers by multinational firms.
The HKMA, the Securities and Futures Commission and the Insurance Authority would be able to override property rights and transfer ownership of banks, brokers, fund companies, insurance firms or clearing houses to another firm to protect depositors, investors or policyholders, or to transfer assets or operations to a "bridge" institution controlled by regulators, or force shareholders and creditors to inject funds in a debt-for-equity swap. As a last resort the government would effectively nationalise the firm temporarily.
The lawmaker representing brokers, Christopher Cheung Wah-fung, says he supports these new powers provided the regulators use them judiciously. He has a point. Regulations tend to be devised in hindsight, and there is no guarantee the rules we are about to get will make us better prepared to respond to the next systemic crisis. No regulatory regime is going to be perfect. There is an argument for keeping the system simple rather than adding to its complexity.
And if the government is still seen to be the one stepping in to save the day, the moral hazard question remains.