Our government can learn a few things watching the financial meltdown in the United States. They have a lot more experience in handling economic cycles and bursting bubbles which are part and parcel of a market economy.
The central government has taken measures to cool down the property market, and the economy as early as last year. But unfortunately, our macro-economic management tools have not been sophisticated enough, and the results have not been too successful.
Although our property boom has to a certain extent been arrested, the stock market is still crazy, and the economy is growing even faster with signs of inflationary pressure setting in. In case the stock market crashes, we will have to face a similar situation as the US is confronting now.
It all boils down to one and only one question: Do we want to bail out the investors? Most economists will advise against it, as this will entail moral hazard. Investors are thus encouraged not to be responsible for their investment decisions and take a "head I win, tail government loses" attitude. Taxpayers are innocent losers.
However, since the stock market is so important to the economy, and a big crash will inevitably have serious repercussions throughout the world, more than US$1 trillion has been pumped into the US and European financial markets to salvage the situation, and it has been openly rumored that the secretive Plunger Protection Team has been out to push up the US stock market.
Early this month, US President George W. Bush made it plain that he wanted to do something about the situation. This is understandable as a general election is just around the corner, and the Iraq War is going neither here nor there.
We had similar situation in Hong Kong around 2000 when the property bubble burst after the Asian financial crisis. Initially the government of the Hong Kong Special Administrative Region let the property market take a free fall, at its height, more than 200,000 families were carrying negative assets. This means that the market value of the property was below the mortgage price, and even after selling the property, the mortgagee still owed the bank money.
Many of them were out of jobs, or had taken a deep salary cut. They were stuck - either unable to pay their monthly mortgage payments, or unable to repay the bank after liquidating the mortgage. The government was finally forced to step in. Subsequently, Hong Kong suffered 68 consecutive months of deflation, one of the longest in modern history, and many of the flats are still 60 percent of their value 10 years ago.