and by the government of China. Such drastic policies. could to some extent be avoided by accepting deficits and devaluations.
Finally, one other recent event raises questions about the Hong Kong government's commitment and ability to adhere to its tradition of conservative fiscal policy. As mentioned earlier, there is no government-supplied de- posit insurance in Hong Kong. In the past, some banks have failed, but government intervention has been offi- cially limited to a policy of accepting or encouraging the takeover or merger of threatened banks by or with stronger ones. However, on September 28, 1983, the Hong Kong government departed from this long-standing policy and took over the Hang Lung Bank. The Financial Secretary. Sir John Bremridge, explained this action by saying that the Hang Lung Bank's failure and the resulting losses to depositors were unacceptable to the gover-
ment.
This departure from long-standing policy can be viewed as a threat to fiscal conservatism and a threat of further devaluations because it represents a major change in the categories of public and private liabilities that are potentially claims against the monetary and fiscal re- serves of the government. Under the long-standing policy. only Hong Kong currency was a claim against the government's monetary reserves, while bank deposits represented (risky) claims backed by the (risky) loans and investments of the banks. If the government has instituted a new policy of protecting depositors against potential losses, the stream of implicit government obligations has increased substantially. Without tax increases, these extra obligations threaten to impair the funds available for backing the Hong Kong currency. While it might be desirable for other reasons, therefore, the takeover of the Hang Lung Bank is a signal that market participants could readily interpret as portending a weak Hong Kong dollar.
References
Hong Kong's financial crisis History analysis, prescription 1982. 4 sur Mani
tury Montier & No-ember December) 2-69 Kareken, John, and Wallace, Neil 1981 On the indeterminancy of equilibrium
exchange rates Quaricri, Journal of Economie: 96 (May, 207 21 Keynes, JM 1924 Preface to the French edition. In 4 trust in monetary a
form Reprint 1971 In vol 4 of The collected writings of John Ma-nard Keyney, pp xvxxu London Macmillan. St Martin Press for the Royal Economi. Society
*
Sargent. Thomas J. and Wallace. Nel 1992. The real bills doctrine versu- thir quantity theory. A reconsideration Journal of Political Econuer, un
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