institutions hoarded liquid funds. ninth, as you all know, major central banks had to step in to provide liquidity in order to ease tightness in the money market. they have been doing so for about three months now, which is not a good sign, because of the implication of a continuing lack of trust among financial institutions in lending to each other. in one particular jurisdiction, a problem at the wholesale money market level triggered a breakdown of depositors ’ confidence at the retail level, resulting in a bank run. in the united states, the fed further responded with a shift in monetary policy, notwithstanding continuing concerns over rising inflation, and cut interest rates twice, presumably to pre - empt credit tightness from adversely affecting economic prospects generally and the property market in particular. tenth, meanwhile, financial institutions in the united states are writing off large amounts quarter after quarter and this is affecting the general availability of credit and prospects of the economy, notwithstanding lower interest rates, and increasing the probability of a recession, although many still put this at less than 50 - 50. this seems to be the general sentiment currently reflected in financial market performance in the united states. there has also been much greater short - term volatility, as new information is absorbed by the market, indicating considerable nervousness. there is risk that the situation may drag on, given that much of the structured products, with varying degrees of uncertainty of repayment, have yet to mature and the associated losses to be realised. this would not be good for the economy and for financial market performance, and so we see ongoing efforts to end this. there is, notably, the super fund or siv initiated by major banks to buy structured products on the market at a discount, thus helping to re - introduce a pricing mechanism for them, but the details of the scheme are still not publicly known. how the sub - prime crisis will play out is still unclear. the fact that hong kong and many emerging markets have so far been spared is not a reason for letting our guard down. the global significance of a slow down, or a recession, in the us economy, after a long period of sustained growth, should not be underestimated. the talk about a de - coupling of the asian economies from the us economy has not been borne out by empirical evidence. and we all know how debilitating it can be for an economy when property prices adjust substantially downwards, forcing families to sit on negative equity mortgages. with a savings rate

country, continuing to benefit from monetary and financial developments on the mainland, although we should not forget that in the capitalist, free market environment that we are in, there is a possibility of market volatility or adjustment being magnified. the task is for all concerned to ensure that they are in a position to cope with magnified volatility, in other words, manage market risks that may be greater than what they have seen in the past. the linked exchange rate system let me turn to the third and last issue that i wish to cover this evening. this concerns our own exchange rate system. i should of course start by re - iterating the firm hksarg policy of keeping our exchange rate to the us dollar within the range of 7. 75 to 7. 85 through the linked exchange rate system, characterised by currency board arrangements that require our monetary base, and any changes in it, to be 100 % backed by us dollars. with the weakening us dollar and the strengthening renminbi ; with the local inflation rate, excluding the temporary effects of tax relief, edging higher ; with an “ asset bubble ” on the lips of many commentators ; with the exchange rate hitting the strong side convertibility undertaking late last month, requiring our passive and un - sterilised foreign exchange intervention, injecting quite a lot of hong kong dollar liquidity into the inter - bank market ; and with current us monetary policy possibly becoming inappropriate for hong kong ; questions have understandably been raised on the appropriateness of the system. let me provide answers to these questions. first, the appropriateness of the linked exchange rate system should be judged by its ability to deliver monetary and financial stability in hong kong through economic cycles, and should not be judged by the short - term cyclical conditions of the economy relative to that of the us economy. the linked exchange rate system has served hong kong extremely well since its establishment. given the small and externally - oriented nature of the hong kong economy and its role as an international financial centre, maintaining exchange rate stability against the us dollar, which is the most commonly used currency for conducting international trade and finance, is conducive to the long - term economic development of hong kong. second, on linking the hong kong dollar to the renminbi instead of the us dollar : this is inappropriate and technically not feasible. the us dollar is still the most appropriate anchor currency for the hong kong dollar, taking into account factors such as international usage, business cycle sync