[Outlook]Weathering the stormIt has become clear that the effects of the collapse of the U.S. housing market and a crisis of confidence ignited by last year’s subprime mortgage crisis are spreading to other sectors of the country’s economy.
People are even more worried because the collapse of the housing market and problems in the financial market combined with fewer jobs will likely slow down consumption, which accounts for 70 percent of U.S. economic activity.
It is time to analyze the impact of the U.S. economic slowdown on Korea’s financial and capital markets and prepare measures against it.
At the news that new employment in U.S. non-agricultural sectors went down for the first two months of this year and that in February the number decreased by 63,000 from the previous month, the Dow Jones industrial average fell to below 12,000, the lowest it’s been since mid-October 2006.
The hiring index, which Wall Street pays the most attention to, indicates that economic activity is slowing down in the manufacturing industry.
The Mortgage Bankers Association said that the rate of loans entering foreclosure in the fourth quarter of last year was a record-high 0.83 percent, an increase from 0.78 percent during the third quarter.
The delinquency rate for all mortgages shot up to 5.82 percent, the highest it’s been since 1985. This indicates that the U.S. housing market is far from recovering from a slowdown despite a series of interest-rate cuts by the U.S. Fed since September 2007.
To make things worse, the problems in the mortgage market do not end with subprime mortgages. They affect prime mortgages as well.
Carlyle Capital, an investment fund linked to Carlyle Group, and Thornburg Mortgage recently failed to meet margin calls. This news came as a shock because these companies invested in bonds that were described as safe by the U.S. government.
At a time when the U.S. benchmark interest rate has been lowered to 3 percent and there is talk about the U.S. Federal Reserve supplying money to the financial market, the margin call crisis in hedge funds has serious implications.
The problems in the housing market caused by the subprime mortgage crisis were believed to be resolved, but now people suspect that their scale is much bigger and that they will lead to a vicious circle in the financial market.
Lenders will collect loans from funds to increase liquidity, and leveraged funds will sell their investments, which will decrease the value of assets.
Foreign investors pulling their investment out of Korean and other emerging markets are related to this phenomenon.
But this is not the only factor that makes the world economy and the financial market gloomy.
International oil prices above $100 per barrel and a surge in raw material prices add to worries about inflation.
People are worried that the era of high growth and low commodity prices is probably being replaced by an era of low growth and high prices.
How are we responding to these problems?
In January this year, the head of the economic policy department at the Ministry of Finance and Economy said in an interview that the economic slowdown that started in the United States, inflation in China, high oil prices and fluctuations in international financial markets threatened the Korean economy. However, growth in domestic demand, popular support and high expectations for the new administration were positive factors for our economy, he added.
It took less than two months for the government’s concerns about threats from outside the country to turn into reality. European countries and Korea hoped that the de-coupling between the world economy and the U.S. economy would continue and that new economics with China at the center would continue to grow.
However, China’s consumer market of $1.5 trillion is too small to make up for a drop in the United States’s $9.5 trillion consumer market.
Moreover, China’s consumption and growth, which served as an economic engine during the past 10 years’ low commodity prices, are now becoming the very causes of inflation around the world.
Even though we hope that our exports continue to remain strong, we need to take the economic slowdown in the United States seriously.
As sluggishness in the U.S. economy, including its housing market, and drastic changes in the global financial market have been confirmed, the new administration must prepare countermeasures.
We should focus on creating good economic and financial policies to overcome this crisis.
*The writer is a professor of business administration at Soongsil University. Translation by the JoongAng Daily staff.
by Jang Beom-shik