Shock treatment

The United States has started major emergency surgery by injecting $700 billion into the money markets. U.S. President George W. Bush said the U.S. economy is faced with an unprecedented challenge, and that the world must respond with unprecedented measures. His statement reflects the pressing sense of crisis. The United States is now under a full policy mobilization order. The cooperation and intervention of the central banks of six major countries, the Federal Reserve’s loan to Bear Stearns and the American International Group (AIG) and the banning of short stock selling are all part of this.

The aim of the present measure is to prevent the U.S. financial system from going into a state of shock after excessive bleeding. The U.S. financial market won’t recover for some time and has called for extensive government intervention. It has acknowledged market failure and called for government intervention. The U.S. Department of the Treasury has asked Congress to give it the authority to pour in the biggest amount of bailout funds in history and an almost unlimited purchase of bad loans. Fortunately, major stocks worldwide bounced back and capital is flowing again.

However, emergency surgery is only a surgical treatment. The basic tumors that the U.S. economy is suffering from, such as excessive household loans, housing market stagnation and low consumption, still exist.

It is also questionable whether the U.S. government bailout funds are enough to contain the financial crisis. It could be that $700 billion is enough to take care of bad loans that have already surfaced, but it may not be enough to cover hidden and additional insolvency. Kenneth Rogoff of Harvard University warned that one to two trillion U.S. dollars was needed as emergency capital.

The current crisis is so severe that no matter what happens, it will not surprise us. The losses from U.S. derivatives haven’t been contained yet and housing prices are still dropping. We must not relax. We must continue to watch how the emergency surgery proceeds.

“We must preemptively respond to circumstances and actively and shrewdly move against unprecedented situations,” said President Lee Myung-bak.

But we should be more cautious. When the economy is in such a state of flux, one false prediction can exacerbate the crisis. We should respond in a timely manner and submit to the market flow. Above all, we shouldn’t reduce our foreign currency holdings; they are our best weapon against the crisis.

The 1929 Great Depression didn’t bottom out until three years later.