The crisis will return

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The crisis will return

Published: 24 Oct. 2025, 00:01

Audio report: written by reporters, read by AI

Cho Yoon-je

The author is a special appointment professor at Yonsei University's School of Economics.

The history of finance is, in many ways, the history of financial crises. Though the modern financial industry is relatively young, nations and markets have faced crises large and small time and again. Since the 17th century, when finance began to take shape, financial shocks have struck the United States and Britain roughly every decade. Even in the 21st century, the world has endured the dot-com bust, the global financial crisis and the European debt crisis. The root cause remains the same — human forgetfulness and greed. After every crisis, regulatory oversight tightens, only to loosen again as memories fade. Economist Charles Kindleberger once likened financial crises to “perennial weeds,” while John Kenneth Galbraith observed that “there is no area of economics in which experience counts for so little as in finance.”

The "Fearless Girl" a bronze sculpture by Kristen Visbal, stands across from the New York Stock Exchange building in the Financial District in New York City on November 6, 2024. [AFP/YONHAP]

Despite temporary corrections following tariff shocks, U.S. stock prices have soared more than 40 percent since April, repeatedly hitting record highs. The prices of gold and digital assets have also surged. Many investors, fearing they might miss out, are borrowing to buy more. U.S. household debt has reached an all-time high, and margin lending has climbed to near-record levels relative to the economy. Korea’s Kospi index has risen nearly 60 percent this year, leading global markets, and housing prices in Seoul have climbed steeply. Liquidity now floods the world.

In the early 20th-century United States, the stock market was largely the domain of the wealthy. But by the 1920s, widespread enthusiasm for investment pushed prices up more than fourfold between 1921 and the crash of October 1929. That bubble was driven by optimism about new technologies — automobiles and electricity — and fueled by easy credit and speculative borrowing. Today, the fervor surrounding artificial intelligence has a similar effect. AI is indeed a transformative innovation, perhaps the greatest since the printing press. Yet there is debate over whether the profits investors expect will materialize as quickly as current stock valuations suggest. It will take time to establish reliable energy supplies, intellectual property protections, ethical standards and regulatory systems. Compared with the Second Industrial Revolution, the AI boom may have less direct impact on employment and overall growth.

After the 2008 global financial crisis, the Group of 20 strengthened financial oversight dramatically, but regulation has since weakened under political pressure, particularly during the Donald Trump administration. The 2008 crisis erupted because markets and regulators failed to grasp the risks embedded in mortgage-backed securities and the complex derivatives tied to them. The result was catastrophic: Around 10 million U.S. families lost their homes, and household net worth fell by more than $10 trillion — roughly two-thirds of the country's GDP at the time.

Korea, too, learned painful lessons from its 1997 foreign exchange crisis, when the economy contracted by 5.7 percent the following year and the government injected more than 200 trillion won ($139 billion) — nearly half of the annual GDP — in public funds to stabilize the financial system. The total cost, including corporate and household losses, was far greater. Crises occur when the prices assigned by markets diverge too far from the real economy, until reality can no longer sustain them. The precise trigger is unpredictable, but policymakers and regulators must be willing to act before the party ends.

There is a saying that crises never arrive when everyone expects them — because preparation prevents them. Yet the likelihood of another global financial crisis within the next five years is rising. The U.S. stock bubble, waning confidence in the dollar and the rapid expansion of unregulated digital assets all heighten the risk. Indices of economic uncertainty and market volatility are climbing, while the mechanisms to respond have grown weaker. International cooperation has receded, global institutions have lost influence and government debt has constrained fiscal flexibility.

Screens in Hana Bank's trading room in central Seoul show the Kospi closing at 3,883.68, up 1.56 percent compared to the previous day, on Oct. 22. [YONHAP]

Korea’s stock market has been subdued for years, so it cannot yet be described as a bubble. But the country faces its own vulnerabilities: household debt among the highest in the world, inflated real estate prices and growing defaults in project financing loans held by secondary financial institutions. Korea is not well prepared to withstand an external shock.

Now is the time to strengthen safeguards and build firewalls. Fiscal and monetary policies should remain steady and credible. Above all, the most effective defense against crisis is trust — from markets and foreign investors alike. The government must demonstrate that its pragmatic approach to economic management is not merely reactive but part of a consistent, forward-looking strategy grounded in reform and policy coherence.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.