The dangers of panic-buying

Kim Chang-gyu
The author is the economic news editor of the JoongAng Ilbo.

“Economist gets the Nobel, but the ex-wife is the real winner,” read the headlines in the news about University of Chicago Prof. Robert Lucas Jr. in October 1995 after winning the Nobel Prize for economics. The honor came with a $1 million prize. His wife, Rita Lucas, had her lawyer include a rare clause in the divorce settlement when the two separated about seven years before. It read that the wife should receive 50 percent of any future Nobel Prize.

Thanks to her exquisite foresight, she was eligible to take half of the prize money. The award was subject to the top federal income tax rate of 39.6 percent plus 3 percent state income tax. After the professor paid his taxes and handed over his ex’s share, he would walk away with hardly any riches and had to comfort himself with the honor. That is why the wife was the true champion of economic theory after her life with an economist.

The economist won the honor for his theory called “rational expectations.” It is a theory that economic agents and investors use all the information about the economy and polices to predict the future and base decisions and act for their best interests. For instance, when authorities administer large stimuli, agents expect higher inflation and income. The stimuli policy may not bring about the desired results.

The same theory applies to the stock market. Share prices reflect all the information and expectations. Those who have access to new information can reap greater profit. Paul Milgrom, Stanford University professor, and Nancy Stokey, a University of Chicago professor who remarried after she divorced with Prof. Lucas Jr., applied the theory to modern finance. In their co-publication, they empirically showed that information-based trading is not possible with rational agents with common knowledge. Trade cannot take place if all agents have the same expectations and information. But activity can pick up when expectations and information vary.

Based on the theory, few would earn or lose big if everyone has access to the same information. But if there is a difference in access to information, someone could make big money while others can lose big. Herd investment by young investors falls under that risk.

The young have become aggressive in taking out loans to invest in housing or stocks. Asset investment has become more of a fad among people in their 20s and 30s. The margin accounts opened by people in their 20s surged 37 percent to 419.6 billion won ($365.9 million) by June from 306.2 billion won in December. The growth was 18 percent in Seoul, 92 percent in southern Chungcheong and 80 percent in Incheon. Those under 30 made up 30.6 percent in bank loans in the second quarter, compared with 27.3 percent in 2017. One out of three who bought an apartment in Seoul were in their 30s as of August.

Investment by the young can be positive for the future and market. But somehow their engrossment appears to be more out of panic, rather on healthy foresight. Their investment is triggered by insecurity and desperation.

Despite multiple regulations, even low-end apartment prices have hit historic highs. Rent prices are ever-rising. The longstanding model of moving from monthly to longer rent to finally affording one’s own home no longer works. The young are frantically turning to hefty loans to secure a home before its value goes higher. Because the purchase is made out of rashness and impulse, there is too much risk.

The young are less informed and knowledgeable about the way of things, corporate information and market trends. They are no match for institutional or professional players with a solid information network.

The financial and real estate markets at home and abroad have become uncertain due to the prolongation of the Covid-19 crisis. The risks become higher. If the young generation fails in their investments, the future of Korea will also become perilous. Their attention must be reoriented toward promoting decent-paying work. Companies must be encouraged to invest and hire.

Yet the legislatiure is busy trotting out antibusiness bills. Nothing seems to be normal these days.