How to avoid meltdown

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How to avoid meltdown

The United States House of Representatives rejected a proposed $700 billion bailout plan, sending financial markets around the globe into a tailspin and spreading fear in the world’s markets. The Dow plummeted 777 points, the biggest drop ever in its history, leaving the United States facing a crisis that could collapse its entire financial system. Insecurities in the financial sector are spreading rapidly on complicated networks of financial derivatives.

Korea’s economy, which is also an open economy, hasn’t escaped harm’s way and has been pushed closer to the abyss. This situation is now at least as serious as the mayhem caused by the financial crisis that hit the country 10 years ago. It is true that Korea’s companies and financial sector have become comparatively healthier since then, but then the international economy was in good shape as well and our economy could be restored with relative ease.

Now, it’s a different ball game. The entire global economy is peering over the cliff’s edge. Everyone, from governments to households and companies, should prepare themselves for very troubled times ahead.

We need stable management of the foreign exchange market if we are to avoid a complete financial meltdown.

Finance Minister Kang Man-soo announced yesterday that the government would inject U.S. dollars from the foreign exchange reserves into the foreign exchange market, if need be. But the government’s foreign exchange policy should be decided more carefully. Unless confidence about the rescue package in the United States is restored, it is difficult to expect the financial markets to be stabilized.

The government should refrain from intervening in the market until there are certain signs that the U.S. market has stabilized and the current account deficit improves.

When foreign exchange transactions are absolutely needed, the dollars from the foreign exchange reserve could be used to help with the transactions. But it is risky to leave the foreign exchange reserve wide open in an attempt to protect the won’s exchange rate.

President Lee Myung-bak said yesterday in Russia that thanks to the government’s preemptive responses, Korea’s stock prices and foreign exchange rate were not damaged as much as in other countries.

That is uncomfortable self-praise since no one can predict when the U.S. financial crisis will end. A gloomy scenario that sees U.S. hedge funds going bankrupt is spreading, and most of all, it is not clear if U.S. lawmakers will pass the revised bailout bill. If the rescue plan becomes ragged in the course of revision, the market will become more suspicious about its impact.

It is not the right time for the government to show optimism. The government should be honest and urge people to work together. Stabilizing the foreign exchange market should be top priority, setting aside other economic policies for consumer prices or economic growth.

History tells us that there is only one way to overcome an economic crisis. Households, companies and the government must be alert about the looming crisis and cooperate to overcome as much as possible.
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