A rally, but for how long?The U.S. Federal Reserve Board has decided to provide a bailout worth $85 billion to the insurance giant American International Group.
This means that the worst-case scenario in which a cascade of bankruptcies take down financial institutions seems to have been averted.
The Korean domestic market panicked over the U.S. financial crisis and now it has calmed down. Korea’s stock market rebounded a day after it plunged and the won, which plunged against the dollar, has reversed course.
But even though one fire was extinguished in the U.S. financial market, it doesn’t mean that the international financial markets are not smoldering beneath the surface.
More large financial companies are likely to go bankrupt. Therefore, the Korean financial authorities should stay alert and respond quickly to any emergencies, should they take place.
Although we can heave a sigh of relief, we need to acknowledge that our financial market is extremely vulnerable to insecurities in the international financial markets. A financial crisis in a foreign market can pummel our domestic financial market.
The financial authorities should examine why Korea’s financial market was so seriously damaged by the U.S. crisis and prepare measures that will prevent something similar from happening in the future.
There is no guarantee that an even more serious crisis won’t happen in the future.
The authorities should set down regulations that concern extreme capital inflows and drains when foreign markets are insecure and that deal with international speculators’ capital. They should also prepare institutional measures to prevent drastic swings in the won-dollar exchange rate.
There is something more worrying than short-term insecurity in the financial market: the possibility of such insecurity spreading into the economy and creating a long-term recession.
Because of the current financial crisis, the global economy might slow down for some time. In such a case, the exports that have sustained our economy will shrink significantly at a time when our economy is already suffering from poor domestic consumption.
If a recession persists over a long period, households and companies won’t be able to repay loans, which spells danger.
This is why the government must observe trends in the market closely and carefully supervise what happens.