[Overseas view]Markets threaten growth pledgeThe inauguration of President Lee Myung-bak has been accompanied by an increased emphasis on economic goals, despite the notable global financial uncertainty.
The new president said he will increase national economic growth to 7 percent a year and double the per capita income to approximately $40,000 annually. He hopes to raise South Korea’s economy from the current rank of 13th in the world to seventh. The Federation of Korean Industries has been quick to praise the emphasis on growth.
Yet there is broad concern that these ambitious tasks will be hard to achieve in the current global economy. In recent weeks, world stock markets have demonstrated notable turmoil. The principal catalyst is the large amount of bad debt related to real estate, originating in the United States but distributed in markets around the world. Current Wall Street losses related to the credit problems are estimated at more than $100 billion.
The situation in the United States has been directly reflected in the Korean stock market, which is relatively closely tied to Wall Street. The Seoul Kospi stock market index has dropped approximately 10 percent this year, after surging an exceptional 32 percent in 2007.
There is also concern about inflationary pressures. This month, the Bank of Korea left the benchmark interest rate unchanged at 5 percent, a five-year high, but Bank Governor Lee Sung-tae admitted there is institutional anxiety over the strength of inflationary pressures. Korean commercial banks have enjoyed relatively strong cash flows, resulting in lower interest rates and growth in demand for housing loans.
By contrast, in response to sharp drops on Wall Street and overseas markets, the U.S. Federal Reserve has lowered the benchmark interest rate. Also, the George W. Bush White House and Democratic-controlled Congress agreed on a rushed stimulus package to involve individual income tax rebates of up to $1,200 for married couples filing taxes jointly and tax cuts for business.
In the popular media, bad news usually drives out good. The alarmed voices of TV commentators provided a contemporary counterpart to the tabloid scare headlines. The tone reinforced public anxiety. A special rate-setting meeting by the U.S. Fed has also fueled concern.
The current anxiety, in the context of the unspoken assumptions of prosperity and the always-rising markets, overshadows the basic truth that authentic free markets go down as well as up. Markets can be inefficient, irrational, manipulated and badly regulated. By definition, however, they reflect basic realities, including public psychology.
The proliferation of types of lending organizations has facilitated the process, but some large established commercial banks clearly put greed before good judgment. The growth of an extremely complicated global financial derivatives market has greatly expanded the possibilities for financial mischief as well as losses. Derivatives have become engines of risk creation as well as risk management.
Individual home loans traditionally based at local banks have been packaged into big bundles of bonds and other debt instruments, peddled around the globe. The scale and complexity of these arrangements mean that small individual loan defaults are much less likely to be noticed quickly.
During the global Great Depression of the 1930s, American humorist Will Rogers became enormously popular. His sense of humor was inherently engaging and his basic self-confidence a great antidote to the enormous fears of those times. The economic problems were unpre-cedented, before or since, including a 25 percent unemployment rate.
Inspired by Will Rogers, here are three direct down-to-earth points: First, as a worker, take pride. The economies of South Korea and the United States are among the largest and most productive on earth.
Second, as a citizen, be concerned. U.S. government intervention directly reflects public sentiment that any significant market downturn is intolerable; fortunately, South Korea has been more restrained. There should be a serious analysis of reintroducing more public oversight of financial activities; this will be a significant test for the new Lee government.
Third, as an investor, do your homework. A good guide is “Security Analysis” by Benjamin Graham and David Dodd, first published in 1934 during the Great Depression, revised and republished regularly since, and directly applicable to global markets. You can even read the book while the TV is on.
*The writer is a professor at Carthage College. He can be reached at firstname.lastname@example.org
by Arthur I. Cyr