[Viewpoint] Treat the disease, not the symptoms

Economist jokes were once very popular.

How is an economist similar to a meteorologist? Their forecasts are always wrong.

Then how are they different? At least in the end, the meteorologist knows why his forecast was wrong.

You can see the point if you look at the reports published by economic research institutes before the global financial crisis started in 2008.

Most economists in domestic and international institutes couldn’t see an inch ahead.

So whenever people complain about bad forecasts and criticize the Meteorological Administration, I quietly back off, suddenly feeling empathy for the meteorologists.

Most economists would not feel guilty about producing forecasts that turned out to be wrong. Economists never consider making predictions their prime duty, although society does.

In contrast, economists teach that the market is unpredictable, and their theories have been awarded multiple Nobel prizes.

However, the economists deserve harsh criticism if they fail to define the fundamental cause of the worldwide financial crisis.

I can fill an entire newspaper page with a list of candidates that have been blamed as the cause of the latest financial crisis. Economists name whatever factor that they detest and include it in the list of evils that should be eliminated. But this does more harm than good.

Cancer stem cells cause other cancer cells. Unless the stem cells are targeted and controlled, other treatments are ineffective. It is the duty of the economists and world leaders to zero in on the stem cells of the crisis and find ways to control them.

First and foremost, peripheral and uncontrollable factors should be excluded from the discussion. In my opinion, we need to limit the grand narratives when seeking the cause of the financial crisis, and exclude globalization or liberalism.

It is true that globalization provided a channel to spread one country’s financial crisis to the world, and blind faith in the market obstructed the introduction of regulations. However, such discussion could be overly speculative and it could be exploited by political groups.

It’s like arguing that we need to get rid of a car because the accelerator is faulty. Instead of throwing away the car, we should find the problem with the broken accelerator and fix the flaw.

Second, the Americans’ argument that global imbalance is to blame for the crisis should be played down. The point of their theory is that emerging economies, including China, are saving too much and buying U.S. treasury bonds in bulk, causing the U.S. interest rate to remain low and leading to the housing bubble.

Such a theory covers up the more fundamental factors of the failed currency policy and financial regulation of the United States. To me, it sounds like a drunkard complaining that he could have drunk less and been healthier if alcohol was more expensive.

Third, we need to hold off discussions of the microscopic factors, such as the compensation for CEOs of financial institutions, risk management that relies heavily on math, new financial derivative products and high-tech maneuvers of the investment banks and funds.

It is not likely that these are the fundamental causes of the repeated large-scale financial crises. Financial crises have occurred in the past, when these did not exist, and in countries other than the United States with less advanced financial sectors.

I believe that the fundamental and realistic solution is to disclose financial liabilities in the account books thoroughly and to concentrate the discussion on finding ways to control liabilities from growing excessively with respect to the size of economy. Liabilities should include not only debts in the private sector but also the liabilities of the government and the public agencies that are becoming more problematic.

Many specialists insist that the financial supervisory authorities need to prevent bubbles from occurring in the first place.

However, that is not very realistic. It might be easier to predict the gender of a fetus without a sonogram than to determine whether an increase of assets is a bubble or substantial growth.

Moreover, when a bubble bursts without a sudden hike of liability, it is easy to handle. It’s when a bubble bursts while accompanied by swollen liability that it poses risk to the entire economy.

When adrenalin-driven scholars and managers claim that a new era has begun that transcends economic theories, when politicians advocate that increasing jobs is more important than preventing inflation and bubbles, and when those responsible for financial supervision take their hands off regulation for the sake of personal benefit, the task of preventing the quiet growth of liabilities in the private sector and the government will be as important as preventing global warming.

*Translation by the JoongAng Daily staff.
The writer is a professor of economics at Sogang University.

By Song E-young