[Viewpoint]The crisis withinAfter running full speed like a horse that’s been given the reins, the financial turmoil growing out of the United States is settling down. Stock prices around the world rebounded after what seemed like an endless fall, and the international financial market began to perk up. In Korea, the won regained a little strength, instantly calming fears of a currency exchange crisis. It may be premature, but the panic appears to be under control.
Although the chaos in the financial markets has subsided, it does not mean that the crisis is over. The worst may be yet to come. The worst will be a long period of stagnation and the potential of a financial crisis from within. Stagnation in the world economy is no longer a prediction; it is destined. The global financial markets were ruined and real asset bubbles, such as real estate, have popped. The world economy has entered a deep tunnel of stagnation. Investments and consumption will be reduced while unemployment will grow.
Economic growth, of course, will be delayed or take a big step backward. Due to the financial crisis’s carpet bombing, asset values have fallen. Incomes will be the next to fall, and consumption, naturally, will suffer even more. Sales will freeze and businesses will suffer. More and more companies will go bankrupt, and more and more people will become jobless.
A vicious economic cycle has begun.
This is unfortunate for the Lee Myung-bak administration. Despite its “Revive the economy” message, global stagnation will lead directly to domestic stagnation. No matter how hard it tries, there is no way for Korea to escape stagnation. Exports will slow down, while domestic consumption will decline. In the meantime, small firms and micro business owners will go bankrupt. Unemployment will rise inevitably, and consumers’ purses will become thinner and thinner. The ordeal is about to begin.
The seed of an internal financial crisis is fueling our fear. The beginning of the U.S. financial meltdown was the popping of real estate bubbles, also known as the subprime mortgage crisis. In Europe, countries that are hardest hit are Ireland, Iceland and Spain, where real estate bubbles once grew so big.
Korea’s bubble is as big as theirs. It is, however, fortunate that Korea had strict regulations governing loan-to-value ratio and debt-to-income ratio. In Korea, loans for housing are smaller than those in the United States and Europe.
And yet, prolonged stagnation and the impact of collapsing overseas real estate markets will likely trigger a nosedive of real estate prices in Korea. While there is no hope for a rise in prices, a large number of properties will likely appear in the market at once because owners will soon face limits in their ability to repay housing loans.
If this is the case, financial institutions besides banks, which make so-called junior mortgages, may become insolvent, and the entire nation’s financial system will face the storm of a liquidity crisis. While a lack of dollars and a weak won are crises from the outside, the fall of real estate prices is a crisis from within.
Construction companies are already going bankrupt because of unsold apartments outside the Seoul metro area, and regional financial institutions that funded such projects are about to become insolvent.
It is also an inauspicious omen that delinquency rates for credit card payments have been rising. Signs of crisis are everywhere.
It is, therefore, not time to celebrate because signs of a foreign exchange crisis have disappeared. While the crisis from outside has calmed, we must control the real crisis within. There is nothing we can do about stagnation. We have to endure it, tightening our purse strings. Instead, the government must give up its obsession with growth and concentrate on calming the aftermath of stagnation.
It must counter real estate bubbles carefully. It must give up its nonsensical policy of supplying 5 million housing units. It should carefully and gradually reduce the size of the market.
The crisis from within is already here - it’s too close to ignore or run away from.
*The writer is an editorial writer of the JoongAng Ilbo.
by Kim Jong-soo