[VIEWPOINT]Prepare now for a possible financial crisis

North Korea’s nuclear test has opened an “age of uncertainty” in our economy. The financial market, which fell into chaos immediately after the nuclear test, luckily has recovered its stability. But as there is no knowing when and how a new situation will develop, the uncertainty has further increased. For this reason, each player concerned with the economy has initiated risk management concerning the nuclear crisis. Households and businesses are busy preparing new spending and investment strategies to prepare for the possible instability of the financial market and an economic slowdown.
The government also hinted at the possibility of changing its policy, taking into account the possibility of a rapid economic downturn. The government has pointlessly argued to date that it will not support the economy artificially even though it resorts to policies that boost the economy, including spending more money.
But since North Korea’s nuclear test, South Korea has openly begun to take the stance that a stronger economic support policy is needed. Such a change in policies is welcome, because the North Korean nuclear crisis has raised the possibility of a decrease in domestic spending and a weakening of our country’s growth.
The government’s crisis management capability is urgently required now that the economy has been shaken by the external shock.
But for the policies to boost the economy to be successful, there are a few points to consider. Above all, there is the concern that supporting the economy may become a way to please voters with the next year’s presidential election ahead. With that in mind, the government may be tempted to pay the economic cost of a North Korean nuclear crisis by spending more money.
In particular, the government is highly likely to easily increase the amount of currency rather than expand the scale of government spending, which requires approval from the National Assembly.
The North Korean nuclear problem has many issues that should be resolved through international cooperation.
If the government clings to the engagement policy toward the North due to political considerations even if it is asked by the international community to change the policy, our economic burden may increase.
If the government miscalculates the economic cost of political decisions, the people will be forced to undertake the economic costs that arise from the wrong decisions. Of course, the need for an economic boost gets bigger as such.
However difficult it is to calculate the economic cost of measures designed to cope with the North Korean nuclear crisis, it is far more important to calculate the cost of each option in advance rather than simply giving the economy a boost. To increase efficiency, policy cooperation between the government and the Bank of Korea should be achieved smoothly.
When it froze the call rate on Oct. 12, the Bank of Korea explained, “Although somewhat weaker than expected, our economy has not greatly deviated from the original course that had been expected months ago.”
This was interpreted as meaning the bank might lower the interest rates when the economy contracts more than originally forecast because of the nuclear crisis.
At present, the policy directions of the government and the Bank of Korea look different because the former thinks of next year’s economic operation while the latter puts off its policy decision until the nuclear crisis becomes tangible.
But the Bank of Korea also needs to operate its interest rate policy preemptively before the crisis becomes clear. The bank should be careful not to send a signal different from that of the government at a point when the crisis becomes manifest.
A monetary policy in a crisis should be characterized by its managing of risks. Alan Greenspan, former U.S. Federal Reserve chairman who was called the “maestro of monetary policy,” also emphasized a monetary policy that focused on risk management. He is noted for having carried out a monetary policy that properly dealt with risk according to all kinds of dangers and uncertain factors.
The Bank of Korea should play the role of a “firefighter” that can subdue uncertainty in the financial market even under unpredictable, risky circumstances by establishing a thorough and meticulous risk management policy.
Lastly, the government’s policies to boost the economy should not just be measures to expand spending but a comprehensive effort to vitalize the economy. In a situation where uncertainty rises, there is “no medicine that works” if economic players have pessimistic expectations.
Even if the interest rate is lowered and public spending is expanded, investment and consumption do not always increase. This is why the government should prepare a comprehensive measure so economic players have optimistic outlooks about the future. To do so, the government should induce investment by actively improving the business environment, and drastically abolishing anti-market and populist policies. The government policy will be a success only when it shows a determination to revive the economy.

* The writer is a professor of economics at Hongik University. Translation by the JoongAng Daily staff.

by Park Won-am