[Viewpoint]Crisis impacts Korea

The U.S. financial crisis, which is seen by many as the worst since the Great Depression, reminds us of the financial crisis in Korea 10 years ago. Then, a cocksure delegation from the International Monetary Fund told our helplessly nervous selves that we needed to withstand the pain of job losses and bankruptcy to regain the trust of investors.

They also said that government’s support shouldn’t be funneled into ailing financial institutions or companies. They added that this was a global standard that Korea must learn.

The delegation was also amazed that the government had handed out a huge sum of money without considering debtors’ repayment capacity. We felt ashamed, as if we were students who broke school regulations.

We felt small when we heard the words “global standards.”

Well, time has passed and Wall Street, the stronghold of “global standards,” is now facing a terrible crisis.

No one knows exactly where the end of the crisis is and how big its effect will be. Bear Stearns, Merrill Lynch and Lehman Brothers, mythic-sounding, titanic investment banks, have disappeared in a span of several months.

They recklessly expanded lending without sufficient review of repayment capacities and didn’t supervise lenders strictly. As a result the crisis devoured them.

In essence, there is no difference between the current U.S. crisis and the financial crisis that hit Asia a decade ago.

The handling of Bear Stearns went beyond the law. The government showed benevolence and mercy in that case.

If the Bank of Korea did the same, the IMF and the United States would refuse to give us a penny for rescue money.

It is like a traffic policeman who is extremely strict with drivers who break minor regulations while regularly driving beyond the speed limit.

One admirable conduct is that top policy makers, including the chairman of the Federal Reserve and the Treasury secretary, handled the cases in a swift yet organized manner.

They observed moves in the market quietly, and at the decisive moment completed their mission with perfection, just like special agents in a spy movie. The controversy over whether the decision was right or not will likely continue but when it comes to performance, they were excellent.

Besides, in the U.S. economy, laying off thousands overnight doesn’t affect the whole system. If new insecurities appear, they will be removed and security in the financial market will be restored in a relatively short time.

Because of the humbling of Merrill Lynch and the collapse of Lehman Brothers, the Korean market fluctuated. But both the stock market and the value of the won rebounded one day after they nosedived. Our financial market will be affected in this way as more news unfolds.

What’s more worrisome is that the U.S. financial crisis might lead to decreasing credit availability, which in turn might shrink the U.S. economy and lead to a global economic slowdown.

In the mid-1980s, American banks that invested in Central and South America suffered huge losses. They were not willing to lend money, and that affected the region’s actual economy significantly.

The term “credit crunch” was coined at that time.

But the current crisis is of another type. Despite the Federal Reserve’s efforts to prevent a tightening of credit, there is still a possibility of a global economic slowdown.

If the global economy slows seriously, our economy can’t avoid damage because exports of goods and services account for 66 percent of our gross domestic product.

There is also a possibility that problems will erupt in household loans, real estate loans and small and midsized business loans.

When the United States, which seemed like an invincible superpower, goes through a severe crisis, we can’t simply look on as if it doesn’t directly concern us.

The financial watchdog and financial companies should monitor the situation with great care to anticipate any potential problems.

The financial watchdog has given financial companies autonomy since the 1990s but now it is reviewing its policy and pondering changing to the opposite direction.

The international financial market’s environment has changed drastically since Korea’s incumbent administration took office.

A supervisor must be strict and fair. We should think seriously about whether the new administration’s “market-friendly monitoring” gives the impression that market players can make some mistakes and still get away with them.

*The writer is a senior researcher at the Korea Institute of Finance. Translation by the JoongAng Daily staff.

by Park Jong-gyu