In Hong Kong anno 2010 we have the standard “modern” set-up: zero credit at zero interest. Following the Fed lead, official interest rates hover around the zero mark. And of course, at such rates hardly any banks wish to lend money – unless of course the government is co-signing. Having undermined the function of interest rates in setting a price on risk and time-preference for liquidity, the government has put a new improved replacement in place – credit allocation by bureaucratic fiat. In the Hong Kong this new trusty plaster is called the “Special Loan Guarantee Scheme“, a scheme under which the government essentially turns itself into the “general bank”, with the “old banks” essentially acting as paperwork filers earning a commission on the pass-through business. What with all the centralization, no doubt the upshot will be an impressive increase in efficiency.
The Hang Seng Bank, just to cite one prominent example, seems to have forgotten that any other type of loan even exists.
The HKSAR government recently announced that due to the “success” of the scheme, its validity would be once again extended, this time until 31 December 2010. According to the government’s site, thus far HK$84,238,969,089.56 worth of loans have been issued.