[Viewpoint]Conditions for a crisis

For Korea’s financial markets, Sept. 1, 2008 was “Black Monday.” Stock prices plunged while interest rates and foreign exchange rates skyrocketed. As if rumors about a “September crisis” were true, the financial market fluctuated on the first day of the month.

The date Oct. 19, 1987 was also a Monday. On the New York Stock Exchange, the index plummeted 508 points that day, down 22.6 percent from the previous day. In terms of daily decline, the situation was worse than on Oct. 24, 1929, a Thursday, the starting point of the Great Depression. Investors probably felt lost because there was no significant cause to which such a plunge could be attributed. It was revealed later that institutional investors’ programmed trading prompted a series of sales, snowballing the volume of stocks that depreciated.

On Seoul’s Black Monday on Sept. 1, there was no real, substantial cause. Everyone knew that the economy was not doing well, and a sell-off by foreign investors was nothing new. In the stock market, already publicized bad news is no longer bad. The government announced a plan for massive tax cuts that day, and it should have worked as a positive force on the markets.

The market, however, headed directly into panic mode, when the so-called psychological defense line collapsed. A slaughter sale led to another slaughter sale. The rumor of a September crisis has become a self-fulfilling prophecy.

Will the rumor of a crisis be enough to precipitate a real one? The September crisis rumor is not about the simple collapse of the stock market. The rumor is that Korea will face round two of the 1997 financial crisis. It suggests that the nation’s foreign currency reserves will run out, and that the country will be incapable of paying back its foreign debts.

The rumor is an ominous prediction that the Korean economy will suffer another free fall.

The government said there is no possibility that the rumor will be realized. The administration also presented case-by-case refutations to concerns of a possible shortage of foreign currency reserves. The current economic condition is not favorable, but it is not serious enough for the economy to collapse at once. And yet, why is the rumor lingering?

I find the reason in the lack of trust in the government. Because the Lee Myung-bak administration has failed to win the market’s trust until now, a groundless rumor is shaking the nation and no one accepts the government’s reassurances.

The progressive pattern of the September crisis rumor is similar to the spread of recent mad cow disease rumors.

Inconsistency in the foreign currency policy has prompted market distrust, and distrust became the spark that lit the fire of rumors about a financial crisis, which have developed into a convincing scenario.

Furthermore, some foreign media, skeptical about Korea’s financial market, reported the crisis rumor and stories boomeranged back to the nation, where they were perceived as clear signs of a looming crisis.

In fact, it is rare that a crisis actually takes place after a rumor of a crisis spreads. Just like the saying that “there is no gold fish in the filling of goldfish-shaped bread,” there is no crisis after a rumor of a crisis. A crisis only comes when we are not aware it is approaching.

No government officials, financial experts and media predicted a crisis on the eve of the 1997 financial crisis. They only knew that it was a crisis when they were faced with it.

Just days before the crisis, the government had said the fundamentals of the Korean economy were sound. On the eve of the U.S. Great Depression, officials, bankers, traders and scholars had no doubt that the U.S. economy would continue to be prosperous.

In this sense, President Lee’s remarks that “the current Korean economy is in a crisis” were intended to avert a real crisis. He rang an alarm bell. A crisis comes when we do not have awareness.

If the Lee administration had not managed to overcome the crisis of candlelight protests against the resumption of U.S. beef imports, it would probably be facing a real crisis right around now. The September economic crisis rumor is likely based on the possibility of crisis.

What we need right now is not an explanation of the rumors of economic crisis. What we need are efforts to restore the public trust so that the rumor of crisis can be silenced for good.

*The writer is an editorial writer of the JoongAng Ilbo.

by Kim Jong-soo