[Viewpoint] Cold medicine for pneumonia

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[Viewpoint] Cold medicine for pneumonia

A crisis comes crashing down when the market can no longer sustain the impediments in its system. It can act like a warning, demanding the market and government take immediate action to implement fundamental reforms. The global financial crisis of 2008 was one of those moments, and reforms were surely needed.

The U.S. economy has long stretched beyond its means on credit-financed spending from an enormous asset bubble, making debt disproportionately high and savings low. Indulgent monetary easing masked the disaster in the making and the government, coaxed by financiers and free market fundamentalists, turned a blind eye to the danger signs and let down its guard. The distortions piled up and then the volcano blew.

In trying to clean up the catastrophe, the leaders in the U.S. and Europe spent a lot and eased the economy monetarily to get out of the hole. Expansionary policies are necessary in order to stave off excessive contractions due to fear. But without structural reforms, those kinds of policies will prove no more than a stopgap in patching up widening imbalances.

Authorities needed to wind down household and corporate debt, but neither the politicians nor the people wanted to share any pain. Because assets and corporate values and debt levels have not been sufficiently restructured, a credit crunch is not eased, even with near-zero interest rates.

A disaster that comes about from spending and lending beyond anyone’s means cannot be fixed without sacrifice and some serious streamlining. But the U.S. and Europe are compulsively relying on expansionary budgeting even as they battle economic distress for the fourth year and neglect urgent reform in the financial system and restructuring of the economic framework.

To use the comparison of Harvard University economist Kenneth Rogoff, the economy has been prescribed medicine to treat a cold when in fact it has caught pneumonia. Wrong prescriptions have led to a prolonged illness and aggravated risks for the entire global economy.

What it really all comes down to is incompetence in world political and government leadership.

The biggest downside of a democracy is that the young generation does not properly exercise its voting rights, and policy makers resort to expedient solutions of deferring today’s problem to the next generation. But such makeshift actions only aggravate market jitters and cast a dark cloud over global economic prospects.

Excess private debt has spilled over to the public sector, undermining fiscal policy options, and China, which has been shouldering the global economic recovery, increasingly has its hands tied because of runaway inflation after years of unrestrained easing.

The necessary debt and asset restructuring in advanced economies will likely deepen economic contractions and a protracted slowdown in the global economy.

Korea has not been an exception in the use of the expansionary prescription and dilly-dallying on restructuring. The country boasts that it was one of the first to come out of the global economic crisis, but its buoyancy came more or less from a depressed currency and stimulus measures in China and at home, rather than from its inner strength.

Growth figures do not ensure escape from dangers. The economy can regain sustainable health when faulty parts and weaknesses are cured and replaced by benevolent and helpful elements. Dieting and tightening should be imposed if necessary.

We can no longer lose time on restructuring our ailing construction companies, mutual savings banks, and small firms. Interest rates should be normalized to speed up their restructuring and constrain household debt. Instead of trying to artificially stimulate the real estate market, it should be allowed to stabilize on its own.

The global economy faces a new environment with the rapid ascent of China and the waning of the U.S. - and possibly a slowdown not seen since the Great Depression. Our economy could be swept away if it does not strengthen its fundamentals.

In the longer run, our society must scrap various systems breeding dirty webs of collaboration to make room for transparency and fair competition to nurture sustained growth.

The mutual savings banks’ corruption scandal showed that our supervisory authorities have returned to their old habits that led to the currency crisis in the late 1990s. The supervisory role was sacrificed to growth targets. Watchdog agencies must restore their independence and end the shabby connections with the institutions that they are supposed to be regulating.

To ensure a smooth flow in the economy, authorities must clean up regularly. Our economy needs dredging work as much as the four rivers. Otherwise we could face inundation when the next major storm comes along.

*The writer is a professor of economics at Sogang University.


By Cho Yoon-je
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