[Viewpoint]Prudence crucial amid volatility

The uncertainty in the housing market and the credit crunch ignited by the subprime mortgage crisis last year are spreading to the overall U.S. economy. Statistics show signs of aggravating employment and shrinking consumer spending, which make up 70 percent of the U.S. economy. A slump in the U.S. economy sends shockwaves around the world. It is time for us to thoroughly analyze the impact on the Korean economy and financial markets, while preparing countermeasures.
In February, the number of new jobs in nonagricultural employment in the United States decreased by 63,000 compared to January. It was the second consecutive month in which the figure fell. A decrease in employment suggests a weakening of economic activity in the service and manufacturing sectors.
The employment figures are one of the key indicators of the direction of the market. The Dow Jones Industrial Average fell below 12,000. The U.S. Mortgage Bankers Association announced that the foreclosure rate reached 0.83 percent in the fourth quarter of 2007, a record high. The delinquency rate for mortgage loans on residential properties was 5.82 percent, the highest in 22 years. In spite of the repeated interest rate cuts by the Federal Reserve Bank, the U.S. housing market has shown no signs of overcoming the slack.
A bigger problem is that the subprime crisis is spreading to prime mortgage loans, as well. Recently, both Carlyle Capital, an affiliate of the private equity investment company Carlyle Group, and Thornburg Mortgage gave up. They failed to meet the margin call and asked for an extension. These companies have invested in prime bonds guaranteed by the U.S. government. Just as the FRB lowered the interest rate 3 percent and vowed to provide credit when necessary, a serious margin call crisis has occurred.
As a result, the optimistic view that the subprime crisis is under control is gone. As the sense of uncertainty spreads, financial companies have set out to collect outstanding loans to make up for the shortage. Now, the funds that borrowed money to invest in derivative products have to sell their assets.
A vicious cycle has begun as the value of assets decreases and swaps increase. The latest outflow of foreign capital from the Korean market is not unrelated to such a phenomenon. There are other factors pressuring the financial market, aside from the sluggish U.S. economy and subprime crisis. The international price of oil is hovering above $100, and the prices of raw materials are skyrocketing. The dark cloud of inflation is gathering over us. All these factors are very serious. It is an accepted opinion that the era of high growth and low prices has ended and that a period of low growth and high prices has come.
In January, the transitional committee of the new administration reckoned a sluggish U.S. market, inflation in China, high oil prices and volatility in the international financial market were the threats to Korea’s economy. The opportunity factors are solid growth in domestic consumption and the spirit and anticipation of the citizens for a new administration. The concerns about the foreign risk factors have already turned out to be true. However, the opportunity factors still remain.
We have been hoping for a decoupling from the U.S. economy and the international economy. Especially when China and other new emerging markets maintain growth, we can lessen the shock, we had hoped. However, while the U.S. market is worth $9.5 trillion, the Chinese consumer market size is only worth $1.5 trillion. It cannot make up for the U.S. market yet. For a while, cheap Chinese products propped up low prices the worldwide. However, the growth and expanding consumption of the Chinese economy has become the source of global inflation.
For now, it is our foremost task to keep up our exports and maintain domestic growth. The financial authorities should delicately handle the interest rate policy in order not to fan inflation expectations. After all, high oil prices and a slump in the U.S. economy are worldwide trends. The fate of the national economy depends on how we respond to these factors. When all things are going well, mistakes can be passed as mistakes. But now, small blunders can lead to a serious aftermath.
As the global market becomes more volatile, the government should be more prudent in making economic and financial policies.

*The writer is a professor of business administration at Soongsil University. Translation by the JoongAng Daily staff.

by Jang Beom-sik