The scale of the present global fallout emanating from Wall Street's collapse is much larger than that of the Asian financial crisis a decade ago, and the worst part is that there is as yet no clue to when the crisis will bottom out. Apart from the financial losses suffered by many investors, the ensuing credit crunch will further depress the economy, thus triggering a vicious cycle.
Banks will become more reluctant to lend. People will become more cautious with spending or putting their hard-earned savings into investments. The property market will contract. Companies may fail and unemployment will go up. All this does not bode well for a quick recovery.
Three issues should top the government's crisis-management agenda. First, restoring public confidence. Panic and uncertainty are always the worst twin enemies in a recession. However, it is of no use to just call for calm. People have to find a reason to be calm. This is where the government and big corporate players come in, by being seen to be capable of delivering positive action to ease the tension and provide a sense of security through social policy measures. Chief Executive Donald Tsang Yam-kuen has reiterated that the authorities will investigate investors' complaints and the Hong Kong Monetary Authority will take action against any retailers found to have been involved in misrepresentation. A proper inquiry is warranted, but investigations and legal action will take time and do not help to contain anxiety and discontent.
In the current minibond crisis, pressure from aggrieved investors is building. Rationally, it may be argued that they could not simply expect a full bailout with taxpayers' money, otherwise this would erode the whole basis of Hong Kong's economic policy and set a precedent obliging government to come to the rescue whenever investors make a bad choice.
If the distributor banks can be persuaded to sort out the problems created by their own role in promoting those high-risk minibonds without making some investors fully aware of the risk involved, this will both underscore the principle of letting the market take care of itself and help to restore confidence in the banking system. The banks, however, will have to consider the costs of buy-back options and balance their shareholders' interests with their corporate image and goodwill.
The second issue involves learning a lesson and stepping up regulatory measures. There have been widespread calls for government to strengthen controls over the financial market. Similar calls were voiced in the aftermath of the Asian financial crisis, leading many nations to adopt more stringent regulatory regimes. Still, this has not prevented new crises from emerging. Even if the regulatory regime is to be further tightened, that will not immunise the government from any future fallout. The financial market has become so sophisticated, and derivative products so complicated, that one cannot expect any regulatory system to provide foolproof protection to investors.