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As the
US grapples with perhaps the worst financial crisis
since the 1930s, many eyes are on Japan. Some analysts
suggest that Japan’s “lost decade” will offer a
blueprint to officials in
Washington.
More
insights may be gleaned from South Korea.
Korea?
What in the world could the 12th-biggest economy teach
the biggest? Spend some time with Kim Yong Duk, a former
deputy Korean finance minister, and it will become clear
how Asia’s experiences in the late 1990s could inform US
officials.
“A lot
of the features are similar between the US’ problems and
the Asian crisis,” Kim says. “In Asia we had reckless
lending, reckless investment and excess liquidity
spilling over into the economy, bailouts and
moral-hazard risks. This time we see those same factors
in the subprime crisis.”
Kim
knows a thing or two about crisis. He recently stepped
down from his job as chairman of
Korea’s Financial Supervisory Commission and was a top
Finance Ministry official when the crisis began in 1997.
He was nicknamed “Mr. Won” for his ability to move
currency markets.
After
Korea received a $57-billion bailout from the
International Monetary Fund (IMF), there was no time to
waste. Weak companies and commercial banks were allowed
to fail. Several merchant banks were closed and their
employees were fired.
Korean
lessons
The
steps created considerable uncertainty, yet Korea was
the first of the Asian-crisis victims to recover and
repay the IMF. While it took Latin America a decade to
lure back capital after its meltdown in the 1980s, Korea
was regaining investors within 18 months.
Things
didn’t always go smoothly. The credit bubbles that were
confined to the corporate sector in the 1990s were
shifted to households. That complicated the challenge of
moving from a developing economy to a developed one.
Still,
Korea’s experiences are more relevant to the
US
than Treasury Secretary Henry Paulson may realize.
Comparing the $13-trillion US economy to Korea’s
$970-billion one seems a reach. Its economy is smaller
than Russia’s, Brazil’s or Spain’s. The US also isn’t
used to taking advice from anyone. You will notice the
IMF isn’t publicly criticizing the US the way it did
Asia a decade ago.
Yet, for
US officials grasping for precedents, Korea is worth
considering. Kim mentions four specific lessons: denial,
investor confidence, low interest rates and the risk of
so-called moral hazard that encourages reckless
behavior.
In
denial
The US
is doing most of what it told Asia not to. It counseled
higher interest rates, stronger currencies, fiscal
belt-tightening, avoiding fresh asset bubbles and limits
on bailing out investors. These days, the US is
reminding the world it’s better at giving economic
advice than taking it.
What
concerns Kim is that by attempting a short-term fix with
lower rates, the US is in denial. The Bush
administration has been reluctant to act boldly or
provide guidelines to restore calm to Wall Street, Kim
says.
“The
steps so far—like relying on more liquidity—aren’t
enough to resolve the current market turmoil,” Kim says.
That
lack of leadership is weighing on investor confidence.
As Korea learned a decade ago, Kim says, investment
banks need to disclose their true exposure to credit
markets, write down losses immediately and shore up
capital bases as fast as possible. If public money is
going to be used to stabilize things, it’s best to do it
sooner rather than later.
“The
worst thing to markets is uncertainty,” Kim says. “If
the news is good or bad, it doesn’t matter—just get it
out.”
Soros’s
warnings
When I
asked George Soros about all this yesterday, the
billionaire investor agreed that President George W.
Bush’s all-regulations-are-bad mindset—which Soros calls
“market fundamentalism”—may prolong the crisis. Soros’s
basic take on things: the
US
isn’t responding enough.
History
will show whether saving Bear Stearns Cos. from collapse
was the right thing to do. Kim says the
US
needs to be careful not to make a habit of bailing out
Wall Street and rewarding reckless risk-takers. Equally
important are regulatory changes that will prevent
similar crises down the road.
Wall
Street’s woes offer an intriguing comparison with
Korea’s family-owned conglomerates, or chaebol. Much
analysis has explored the “shadow-banking system” that
has emerged in recent years to subvert government
regulations and allow banks to make highly leveraged
bets. Many chief executive officers didn’t even know how
vulnerable their institutions were.
Seoul searching
As Wall
Street’s speculation went wrong, losses spilled over
onto the laps of government officials and average
consumers. That’s a lot like what happened in Korea in
the mid-1990s. Are investment banks now the
US’
answer to the chaebol?
Korea
isn’t a role model for change. It’s too closed to
foreign investment, needs more entrepreneurship and the
chaebol are still too dominant and slow the nation’s
efforts to break with the corruption of the past. That
doesn’t mean Korea’s crisis playbook isn’t worth a look.
Rather than
Tokyo, policy makers might want to look to
Seoul.
“The
priority is to restore confidence, and fast,” Kim says.
“Otherwise, problems balloon and hurt the real economy.” |
