[Viewpoint] Demographics forewarn a crisis

A recent study by the Bank of Japan demonstrated that demographics can forewarn financial crisis. In Japan, the working-age population peaked in 1990. Housing overvaluation peaked the same year and the foam began to fizzle out the following year. The bursting of the asset bubble froze the financial market years later.

The peak in the U.S. was from 2005 to 2010 and asset bubbles began to burst from 2007, exacting an unprecedented financial meltdown the following year. The same relationship between demographics and financial stability also exists in crisis-hit Spain and Ireland. Both working-age population growth and housing prices peaked in 2005. The same peak for Greece and Portugal had been in 2000. Labor data point to China’s peak in 2015-2017 and Korea’s in 2010-2012.

Demographic predictions are not the only variable that can predict collapse in housing prices and a financial crisis. A country’s resourcefulness, the extent of overvaluation in property assets, mortgage exposure in financial institutions and the competence of financial supervisory officials can have an impact.

But unfortunately, our country’s case more closely matches the perilous picture. We lack natural resources and asset value. Our household debt to income ratio is dangerously higher than that of many other countries. A financial crisis does not occur in chain reactions after the collapse of a major bank. It usually starts with the fall of small financial institutions like Sanyo Securities in Japan and Northern Rock in Britain. Could the demise of Korean mutual savings banks be the ominous harbinger in our economy?

Excess anxiety can be harmful, but we should not underestimate today’s risks. A crisis stews from small fumes when the economy shakes from external shocks. When vulnerable areas are hit, the entire economy can be impaired.

We took serious countermeasures when the Wall Street-sparked financial crisis gripped the global economy and weathered the epidemic with minor pains. But the financial sector and economy consequently became addicted to artificial stimulus. Moral hazard has become rampant in the financial sector, which has resorted to expedient loan rollovers. Consumer debt fueled by unprecedentedly low interest rates surged, while inflated consumer prices have eaten up household income. Our budgetary state has also worsened.

It would be wonderful if the troubles ended here. But the global economy is under dark clouds with growing prospects for prolonged recession. Moreover, Europe and the U.S. as well as our country have used up policy measures trying to stave off external shocks, and we are now left with few other options to prevent implosion.

The government must prioritize maintaining security in the financial sector and promoting sustainable growth. Hasty moves to boost growth can offset speculation in the real estate market and inflate the bubble. At the same time, authorities must keep a close eye on housing supply and demand so that prices do not suddenly plummet.

The government should also hone its financial supervisory system as loose supervision exacted the meltdown in the savings bank industry. Authorities should not stop at reprimanding a few staff members. They must seriously consider a complete re-examination and realignment of the entire system. The sovereignty of the central bank and financial watchdog agency has been violated several times under the incumbent government, which has presided over inflation and the savings-bank crisis.

Since the global financial crisis, surveillance in macroeconomic policy as well as in the financial sector has become important. The National Assembly recently revised the Bank of Korea law to make the bank partially responsible for upholding financial stability.

But it is unclear how the central bank, which has the primary role of setting the benchmark in interest rates, can take up the complex role of stabilizing the financial sector. The new role would only enhance political pressure and interference in monetary policy.

The centralization of the Financial Services Commission that oversees both financial policies and supervision should be changed. Supervision often becomes secondary to policy making. Authorities must also rethink overall policy direction when it comes to the financial industry and consider ideas like encouraging enlargement of financial institutions.

Nothing can stop aging. We need to revamp and reinvent our economic policies and the overall system to meet the demographic and circumstantial changes that we are now confronting. We have new needs in welfare, finance and macroeconomics.

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

By Cho Yoon-jae