Dangerous doubling down
The author is head of the economic policy team at the JoongAng Ilbo.
A gambler tends to raise the bet if he loses money. Likewise, a fund manager is tempted to go after higher risks to make up for earlier losses. An entrepreneur may put the company in a bigger crisis by carrying out a reckless venture. People resort to extremes when pushed into corners.
Such behavior was explained in the prospect theory. Daniel Kahneman, an emeritus professor of economics at Princeton University, challenged the classical expected utility theory to win the 2002 Noble Prize in Economic Sciences. His argument was based on his theory that humans try to avoid losses as they are inclined to accept losses more seriously than gains. In other words, losses hurt more than gains. As a result, in a profit phase, they become risk-averse to make a safer choice, while in a loss phase, they prefer taking risks.
The government and ruling Democratic Party (DP) have entered the loss phase after their vaccine fumbles and by-election defeats. Desperate to win back public approval, they are resorting to heedless moves to make amends. The government has been nearly hopeless with its vaccine programs. Though the government on Saturday announced a new contract with Pfizer to import shots for 20 million people, the way it approached the issue already deepened the public’s confusion and anxiety through many flip-flops in the past.
Government officials floated the idea of a vaccine swap with the United States and then announced a local drugmaker would be consigned with the production of an internationally authorized vaccine. Administration of AstraZeneca vaccines the country secured have been disturbed by concerns about blood clotting. The government laid down various cards to lessen public disgruntlement over the slow vaccination program, but it turned out to be the boy who cried wolf.
Rep. Song Young-gil, bidding to become the new chief of the DP, proposes to lift the loan-to-value ratio up to 90 percent to allow mortgages for people without homes. He even promises to make home purchases possible for young people with marriage gift cash alone.
There is no reflection on the past mistakes of distorting the market and pushing up home prices. There is no thought about housing supply. The only idea is to make loans easier to allow people buy homes — a drastic departure from its earlier regulation-based approach.
DP Rep. Min Hyung-bae even proposed a debt write-off to revise the Bank Act and Financial Consumer Protection Act. The bill forces commercial banks to reduce the amount of loan repayment for the self-employed or small merchants if their incomes have sharply declined from Covid-19 or other disasters. Nowhere in the world are banks compelled to write off their customers’ debt.
The idea is even opposed by government officials, lawmakers and researchers in the National Assembly. The move could stoke moral hazard of debtors and translate into pain for those who dutifully paid off their debts. Greater loss-taking would surely force commercial banks to toughen standards for new loans. Since defining a disaster is also ambiguous, the write-off provision can be abused. In that case, the entire financial sector could fall under a risk. A DP lawmaker on the Policy Committee had to release a statement saying the bill has not been submitted to the subcommittee yet.
Losing public support is a huge problem for the DP ahead of the presidential election next March. But risky betting out of rashness could be more dangerous. The ruling party must think again about its strategy to win back public support.