##e was not as potent as it was hoped, the economic conditions post - crisis would have been a lot worse without these unconventional monetary policies. at this juncture, based on the empirical evidence available so far, it is hard to judge one way or the other whether the unconventional monetary policies have worked, or will work. 15. however, it should not take long to find out the answer. this is the fifth year of qe in the us ; and the main issue now is not to what extent qe has helped economic recovery since 2009, but what happens when the fed actually exits from these accommodative policies. of course we don ’ t know exactly when the fed will exit, which entails three stages : tapering in the asset purchase programme, ending the purchase programme and eventually raising policy rates. chairman bernanke and some fomc members have made it clear the timing of these stages is still uncertain as it will depend on the actual pace of economic recovery and improvement in the job market. the three stages have long been known to the markets and are nothing new. however, when chairman bernanke talked about a possible timeline for tapering in may and june, the us and global asset markets reacted strongly with both bond and stock prices taking a beating. it is particularly noteworthy that chairman bernanke ’ s remarks triggered selling off in many emerging market economies, especially those with weak current account positions. as a result, it took the chairman and his fomc members considerable time and effort to clarify that tapering was not “ tightening ” and there was still a long way to go before us interest rates would rise. lately, there has also been some rather strange market behaviour, with the markets going down when the economic or employment data showed some improvement, which in theory should have been good news ; and markets rising when jobs or employment data showed signs of softening. this pattern is quite different to what conventional wisdom would suggest. it also highlights the uncertainty and risk that when asset markets have been supported by low interest rates and high liquidity for a prolonged period, the normalisation of the interest rate and liquidity conditions could create the kind of market dynamics that may destabilise the financial system and dislocate the recovery path of the real economy. 16. nevertheless, we don ’ t know how long these perverse market dynamics will persist and how they may impact on the fed ’ s exit. we certainly hope the world will benefit from an orderly

sharply from about 200 % of gdp at the end of 2008 to 230 % of late. 7. there are many narratives on why this trend of rising indebtedness has occurred. perhaps the financial “ deepening ” had made credit much easier and cheaper for many households and corporates to obtain. or, financial innovation in the form of securitisation and financial derivatives, such as cds and cdos, enabled leverage to be amplified and distributed throughout the financial system and beyond. but, the cause of this alarming trend is not the issue. the point i wish to make is that most people had become insensitive to the excessive levels of indebtedness and leveraging, and the resulting imbalances and vulnerabilities that had built up prior to the global financial crisis and the european sovereign debt crisis. clearly, many people would now question the validity of this mindset. but have we learnt our lessons? unfortunately, i ’ m not so sure we have. while most people would agree with the view that excessive debt and leveraging was a major factor leading to the crises in the us and europe, many would still think it is possible to overcome the problems without having to deleverage or somehow avoid the pain arising from the deleveraging process. 8. on the subject of pain, most of us understand what happens when we live beyond our means through borrowings at the individual, household or corporate level. without any increase in productivity or income, excessive levels of debt can lead to insolvency or bankruptcy, which entails very serious and unpleasant consequences. however, the situation is a lot less clear when it comes to a country incurring excessive debt because the usual bankruptcy rules do not apply. indeed, when compared to households or corporates, there are two significant problems relating to governments spending beyond their means. first, there is the temptation for governments to continue to incur deficits as the market seems to be quite willing, at least for a while, to finance such deficits. in this context, greece is a good recent example. secondly, there is the usual political pressure for governments to spend and borrow now, and worry about repayment later. unlike an individual borrowing money, government borrowing can be rolled over and increased over such an extended period that repayment becomes a problem for the next generation not the present one. sadly, this kind of behaviour is rather common and widespread. it is hard to imagine a reasonable person wanting to maintain a