‘Corona19 Economic Crisis’ dissected by the first finance chairman
● Systemic paralysis level crisis without pre-signs
● What you should not have to do to the level of the Great Depression of 1929
● Slowing growth in the long-term economy
● Considering the national debt ratio, han should play a role
-Away from economic immunity in the face of crisis due to the policy
Jeon Kwang-woo (71) Chairman of the World Economic Research Institute (Former Finance Chairman) [지호영 기자]Globalization has caused infectious diseases in local Chinese cities to move to financial markets in New York and London. Manufacturing plants in Europe and Asia have been shut down. Cracks began to fall into the global supply chain, the epitome of free trade. Politics is made up of national people, but the economy is intertwined and forms an ecosystem. We need to have an eye to read the global economy and the international financial markets to see a sketch to overcome the crisis.
Jeon Kwang-woo (71), chairman of the World Economic Research Institute (former finance chairman), is a rare expert with experience in the working sands of the global economy and the Korean economy. He received his Ph.D. in Business Administration from Indiana University, USA, and became a professor at Michigan State University in 1982. From 1986 to 1998, he was a senior economist at the World Bank (IBRD), head of international finance, and the World Bank chief of the Paris Club.
In Korea, the former director was used by various regimes, regardless of left or right. In 1998, when the International Monetary Fund (IMF) foreign exchange crisis broke out, he returned home at the invitation of the Kim Yong-sam government and served as deputy prime minister and minister of finance and economy until the early days of the Kim Tae-chung government. He served as ambassador to the Ministry of Foreign Affairs and Trade as an international finance ambassador to the Nomu-hyun government. In 2008, when Lee Myung-bak was in government, he was the first finance chairman to lead the resolution of the global financial crisis. He has since served as chairman of the National Pension Service from 2009.12 to 2013.04.
In January of this year, we unveiled “The Financial Life of Jeonguang-woo” (Your Library). This book captures the intellectual journey of experts who have held various positions in the economic and financial sectors. On April 2, he sat down with him at the World Economic Research Institute in Gangnam-gu, Seoul.
– In many cases, they are at the forefront of the economic crisis.
“That’s it. I think life has to do with this crisis.” (Laughs) – What makes this crisis different compared to the global financial crisis of 2008?
“The catalyst for the 2008 crisis was the Lehman Brothers bankruptcy in September of that year. Subprime mortgage issues have been raised before then, and bear Stearns went bankrupt six months ago (March). In other words, there were signs of crisis. Unlike other economic crises, including infectious diseases, there were few prior signs of this crisis.”
If the economy is in its body, the systemic paralysis level crisis
Stock traders peer into the monitor on the New York Stock Exchange on March 11 (local time). The Dow Jones 30 Industrial Average was up 1464.94 points (5.86%) from the previous day. fell. [뉴욕=AP 뉴시스]
– Does that mean that there were no signs of a crisis in each area of the economy.
In the event of an economic crisis or financial crisis, an early warning system is triggered through pre-signs. There is also a process of monitoring in advance with your own alertness. The new coronavirus infection (Corona 19) began with an unexpected outbreak in Wuhan, China. At first, it was possible to end up in China or neighboring countries, but it spread uncontrollably around the world. When it was triggered by a special cause of infectious diseases, everything was stagnant. The movement of people has become “all-stop”, not only in the global production system but also in consumption. Assuming the economy is a body, this is a systemic paralysis crisis.”
– There is a lot of interaction with foreign experts, what is the temperature of the crisis they feel?
“The temperature difference is quite severe. In the past, there were not many cases where there was such a temperature difference in the crisis. In short-term shocks, most professionals usually have a common perception. The situation in the second quarter will be the worst. Depending on whether you can rebound in the third quarter or not, you’ll be confused with v-shaped, U-shaped, L-shaped, i-shaped, etc. Of course, policymakers and entrepreneurs need to assume and prepare for the worst, but in the mainstream and mainstream, there are more people who believe the U.S. economy will recover relatively quickly.”
– What is the rationale.
“The United States has policy measures. The Federal Reserve has vowed to make unlimited quantitative easing. Mid-January was the first confirmed confirmation in the United States. Corona 19 was a full-fledged issue in the United States in March. On February 12, the Dow Jones index hit an all-time high of 29551.42. The U.S. economy was very healthy. By February, the real economy was healthy enough that the unemployment rate would reach 3.5 percent, the lowest level in the last 50 years. The pace of recovery in the economy depends on how resilient it is. In that sense, the U.S. economy is relatively better than other countries that can handle the impact of Corona 19.”
Be prepared for a catastrophe…
– Some point out that the United States and other developed countries have already maintained ultra-low interest rates and quantitative easing since 2008, and that they do not have the cards to use.
“It is true that the debt increased a lot in the course of the 2008 financial crisis. Corporate debt has skyrocketed at a low interest rate. It is said that the national debt, or financial status, is the highest level since the Second World War. There is no doubt that it will serve as a limit to the process of overcoming the crisis. The market reaction was lukewarm even after the Fed lowered interest rates by 1.5 percentage points (virtually) to zero on two occasions. It’s only a difference between lowering interest rates at 10% and 5%, and lowering interest rates to zero at already ultra-low interest rates.”
In this passage, he drew the word quantitative and qualitative easing (QQE). QQE means expanding the range of asset types that central banks buy into some risky financial assets, from existing government bonds to corporate bonds to stocks. In 2013, the word QQE began to be used in earnest when the Central Bank of Japan (BOJ) expanded the number of bonds to be purchased into publicly traded index funds (ETFs) and corporate bonds. The former chairman of the board continued.
“The Fed has decided to buy cp (corporate notes). The U.S. economy has been booming for 11 years from 2009 to early this year. The power lies in technological innovation. Thanks to this, it appears that the potential expansion of liquidity is somewhat blocking the side effects that lead to inflation. Of course, there is light and shadow in any policy. If the central bank loosens the money, it will have to deal with side effects someday. The more fragile the economy, the more dysfunctional it can be, and the more you should be careful. However, in the United States, this is relatively free.”
U.S. Treasury Secretary Steven Mnuchin expressed optimism in an interview with Fox News on March 29 (local time) that “gross domestic product (GDP) figures will jump significantly in the third quarter of this year, and unemployment will fall to an existing low.”
“When I was in the past during the IMF crisis or the global financial crisis, my words were, ‘Hope for the best, but be prepared for the worst.’ Those who deal with policy, including Finance Minister Mnuchin, respond with such hope.”
– I agree with Minister Mnuchin’s optimism.
“The Economist, the UK’s economic weekly, has analyzed the corona 19 spread in the form of daily breaking news. This time, a funny story was published. Unlike the crisis sparked by the economic sector, the impact of natural disasters is relatively quick to recover. This is because shocks are often transitional and temporary. A few years ago, a tornado struck Louisiana, usa, devastating the state. Unemployment has skyrocketed, and it has recovered in a matter of months. This time, if control over infectious diseases is delayed, the impact will be much greater, but there is room for the economy to recover as it enters the first half of the year.”
– There are experts compared to the Great Depression of 1929.
“The stock market hates uncertainty the most. The market panic is stronger than weak, even if the government puts out a drastic stimulus plan. The United States, which accounts for 70 percent of gdp (gross domestic product), comes from consumption, and the consumer channel, distributors, are laying off their employees. He also talks about “there will be no car sales in March.” The magnitude of the crisis has increased anxiety. But the Great Depression dragged on for years. We need to be prepared for a catastrophic scenario, but is this a level of shock? The second quarter downturn seems inevitable, but it seems appropriate to think that the recovery could be pulled if Corona 19 didn’t spread out of control.”
There was no alternative other than ‘Helicopter Ben’.
Former U.S. Federal Reserve Chairman Ben Bernanke, left, speaks with Former Finance Chairman Jeon Kwang-woo at the 2015 Dong-A International Financial Forum co-hosted by Dong-A Ilbo and Channel A at the Crystal Ballroom at Lotte Hotel in Central Seoul, Seoul, May 27, 2015. [양회성 동아일보 기자]
Zhang Ha-jun, professor of economics at the University of Cambridge, said in a CBS interview on March 19, “During the 2008 financial crisis, the system was not properly reformed and the problem was sealed. He had just loosened his money by saying that he would inflate the quantitative rate at a low interest rate that was not in the history of capitalism, and the money did not go well with the real economy. In the face of a bubble in the financial markets, Corona 19 has burst into tears.” In 2008, I asked the former chairman of the Board of Directors, who was the party to overcoming the financial crisis.
– Recently, Prof. Zhang Ha-jun argued that corona 19 was a primer and that this crisis was created because of the wrong way to deal with the 2008 financial crisis.
“Looking back on the history of the crisis over the past hundreds of years, the pattern of overheating and rupture has been repeated.’ The end of a crisis is the point at which the next crisis is conceived. When there is an economic crisis, it is inevitable that in the process of dealing with it, the money will be loosened in such a way that the policy of expansion will be spent. It also leads to overheating, and when the bubbles build up, it explodes someday and creates a crisis again. In the meantime, there may be talk of whether or not the money was too much to be done in the process of overcoming it in 2008. But if Ben Bernanski hadn’t released the money so much, like “Helicopter Ben,” would he have recovered so quickly? At the time, there were few other alternatives.”
Former Fed Chairman Ben Bernanke is famous for saying, “If the economy gets into deflation, we’re going to support the economy by spraying money in the air by helicopter.” He was originally an economist who studied the Great Depression. Bernanke reportedly met with the former chairman of the board in Washington, D.C., in 2008.
“President Franklin Roosevelt’s great achievement in overcoming the Great Depression of the 1930s was not the introduction of certain policies like the New Deal, but his resolute determination and courage to do whatever it took to restore the vitality of the nation’s economy.” (During ‘The Financial Life of Jeongwang-woo’)
The former director continued, “The most desirable thing is to absorb the money released from the crisis in a timely manner to reduce the risk in advance.”
“When we save the economy as a stimulus measure, the risk is reduced if we put weight on the constitutional reinforcement side so that companies can grow their own self-sufficiency. It is up to the government to make the macroeconomic environment better.”
In a daily column last year, he wrote, “Although the Fed’s U-turn on monetary policy is called an “insurance rate cut” in preparation for a downturn in the economy, it is difficult to deny the US government’s attempt to hold next year’s presidential election.” I pointed out the phenomenon of “politicizing of policy.”
“President Trump has blatantly interfered with the Fed, whether in the media or on Twitter. One of the backgrounds of the U.S.-China trade war was the bullish ness of the U.S. dollar. Trump’s idea is that if other conditions are the same, the value of his currency will go down when interest rates are lowered, which is why the Fed is not implementing such a policy. It’s a very blatant interference.”
In this regard, President Trump referred to the Fed at a White House press conference announcing additional measures related to Corona 19 on March 14 (local time), saying, “We have to take the lead, but we are falling behind.” The next day, the Fed said it would cut its benchmark interest rate by 1 percentage point from 1.00 to 1.25% to 0.00% to 0.25%. Some interpreted it as President Trump’s pressure on Chairman Jerome Powell. The former director drew a line in this view, saying, “Because of the severity and seriousness of the situation, it appears that Powell made a decision based on the Fed’s internal consensus.”
“At this time, the Fed has dramatically increased the number of currency swaps that the Fed has to deal with with countries around the world. In recent years, the company has also established a repo-repo-type window, which lends dollars to emerging countries as collateral for U.S. bonds. It is an unconventional policy that was not used during the 2008 financial crisis. It seems to reflect the imminent mood within the Fed that it will be able to cushion the short-term shock, rather than because of Trump’s pressure.”
1% growth china is a big variable in the economy
– Let’s move on to the Chinese economy. China’s debt has been growing steeply. Corona 19 has no risk concerns from China.
“Professor Kenneth Rogoff and Carman Reinhart of Harvard University, in their empirical analysis of the book ‘This Time is Different’, have shown that the crisis of the past hundreds of years has often led to one cause: excessive debt. China has a lot of local government debt. It is also estimated that the national debt has exceeded 300% of GDP. There are risks posed by shadow finance, and there is also the issue of the real estate bubble. This reduces the means of policy. The People’s Bank of China has also increased its finances since the Corona 19 crisis, but it is not officially clear how drastic it is.”
In this passage, he looked at the weakness of the Chinese economy.
“There have been voices for years pointing out that China is too late to recover the deleveraging and debt reduction, or loosened money. China has been worried about inflation since last year when major countries, such as the United States, are concerned about deflation rather than inflation. The central bank has become cautious about loosening liquidity and lowering interest rates.”
The IMF released its World Economic Outlook report on April 14 (local time) that showed China’s economic growth rate of 1.2 percent this year. It is not negative growth, but it is at a rapid level compared to the 6.1% recorded last year. The former director added, “There is a possibility that the structural problems that were potential lysis would erupt when China grew at a high level.”
“When people are healthy, they endure some medical conditions, but when their health deteriorates, they are easily exposed to external viruses. The 1-2% growth rate basically means that new job creation is greatly reduced. If we don’t get a job under the Chinese communist system, it can lead to a very serious political problem.”
– The rok-China economy is tightly intertwined. Will Chinese risk act as a variable for the Korean economy?
Yes. It is not good news for us that the Chinese economy has entered a recession after a boom period. This is the difference from the global financial crisis of 2008. 2008 was a time when the Chinese economy was doing well. China, which is highly dependent on exports, has benefited from the boom. In this case, such an effect may not be the case. On the contrary, if chinese demand shrinks rapidly, it could be an additional evil for our economy.”
In the early days of corona19 outbreak, domestic defense experts said they would close the border. Whether it’s corona 19 or avian influenza, the first step in preventing the infection is the blockade of the source of infection. Anti-economy is a benefit that should be opened up. Companies cross borders in search of raw material accounts that will help reduce product costs and secure technology. Corona19 is likely to drive structural changes in the global supply chain. I asked the former chairman of the board:
– Corona 19 is expected to lead to localization of the global supply chain.
“You can. The city of Wuhan, where Corona 19 broke out, is an important hub in the supply chain. Even in China, the Wuhan Hubei region serves as a manufacturing hub. As a result, concerns about the global supply chain have spread, and in fact, there have been efforts to diversify. In particular, the chinese economy has passed a period of high growth, and in the context of foreign companies, China’s wage levels have become more burdensome than in the past, as well as in other countries such as Vietnam. Corona 19 has the potential to make its movement more visible. There will soon be a variety of movements, such as building a backup facility that can cushion the problems of a single supply chain being cut off.”
Bank of Korea, Quantitative When you are contemplating qualitative easing
Jeon Kwang-woo (71) Chairman of the World Economic Research Institute (Former Finance Chairman) [지호영 기자]
– There have also been voices in Korea that manufacturing plants that went abroad after last year’s Economic War should be encouraged to “reshoring” production bases in their own countries.
“People who do business may not come to Korea if it helps corporate competitiveness, productivity, and profitability. In the automotive industry, the per capita wage level is higher than that of the world’s largest automakers, Volkswagen and Toyota. Over the past few years, the union has become stronger, and relations between labor and labor have strained. If you analyze the factors that determine foreign direct investment, the biggest factor is labor market flexibility. The influx of foreign direct investment in korea’s manufacturing sector is almost uncompetitive. A good environment for foreign investors is also helpful for domestic investment. It’s good for some companies to come back to korea and create jobs. In order to do so, the government must create an attractive management environment.”
Now that we have looked at the global economic situation from the United States to China, we have turned the words of the interview into the Government of Moon Jae-in and the South Korean economy.
– Regarding crisis management, he once said, “The initial response should be preemptive and bold, but the exit strategy should be done cautiously and gradually.” The government’s response to Moon Jae-in is consistent with these principles.
“Whether it was a response to the economic crisis or a defense. In the economic crisis, the exit phase refers to the physical reinforcement phase that reaps liquidity. At this stage, the nutrition should not be cut off too quickly. That means don’t rush the exit strategy. The initial response should be drastic and preemptive, so that risk factors should be blocked as much as possible. In the case of Corona19, the common argument of pest control and medical professionals in the first phase was to block the infected source as much as possible. In the meantime, the government hastened its exit strategy by saying that Corona 19 is coming to an end, and that everyone should do normal activities.”
The Bank of Korea agreed to provide unlimited liquidity to financial companies for three months from April to June in order to alleviate financial market unrest caused by the spread of Corona19 and minimize the impact on the real economy.
– The Bank of Korea has embarked on virtually unlimited quantitative easing.
“The Bank of Korea’s measures should be viewed as an unlimited mitigation of the limited meaning. Based on the Bank of Korea Act, the Bank of Korea is not allowed to buy corporate bonds and corporate notes (CP).
In this regard, the Bank of Korea said on March 23, “Article 68 of the Haneun Act limits the securities to be traded on the open market to “freely distributed and the conditions of issuance are fully implemented.” “Direct purchases of corporate bonds and CP are regulations prohibiting the purchase of privately issued bonds (Article 79 trillion), which is difficult to enforce in the absence of government guarantees. In the case of the Fed, cp is being purchased under the government’s guarantee of payment.” Former DirectorZhang continued.
“Looking at the trend of the situation, it may be said that it is not enough. Han also needs to consider whether to expand the scope of support through quantitative and qualitative easing (QQE). There are limits to keeping financial stopping them. The national debt ratio is now 40% of the country’s GDP, and some argue that it is not very high. Although the facts are correct, the trend is that it is absolutely important to analyze the economic situation. Without special measures to increase the potential growth rate, the deficit is bound to continue to grow. Welfare spending is on the rise as the population ages. It is a situation where the principle of fiscal restraint should be observed as much as possible. It is time to discuss whether the Bank of Korea should play a role in reducing the financial burden a little bit.”
It may be difficult to maximize net function even if you pour out support measures.
– Moon Jae-in’s government has decided to release emergency disaster assistance. The ruling camp argues that “the ratio of national debt is still sound.”
“A crisis like Corona19 could speed up government debt growth. It’s time to think about other policy alternatives.”
On the other hand, household debt is also a primer for the Korean economy. According to the Bank of Korea’s “Household Credit during the Fourth Quarter of 2019” on February 25, the domestic household credit balance (household debt) at the end of last year was 1600.1trillion won, exceeding KRW 1600 trillion for the first time. Household credit increased by 63.4 trillion won (up 4.1% year-over-year) over the past year. I asked the former chairman of the board of directors this question.
– Growth momentum has disappeared in the period industry, and the risk to the economy has increased with Corona 19. Is it possible that household debt will be a bomb even if Corona 19 ends?
“The rate of increase in household debt has accelerated considerably. There are also many mortgages. Some may say that the debt repayment burden is relatively small because of the ultra-low interest rates, but if the economy deteriorates, unemployment increases and incomedecreases, repayment becomes much more difficult. The insolvency of household debt can become severe. The fundamental measure solving the problem of household debt is growth. They need to be able to pay off their debts as they have more jobs and incomes. This is not a problem that will be solved by lower interest rates. It’s hard to tell how the real estate market will go, but if the price of a mortgaged house falls dramatically depending on the situation, the problem of household debt can become serious.”
– Many experts have pointed out that the government’s policies, such as income-driven growth, have resulted in higher labor costs and reduced jobs. How has the current policy environment affected corona 19?
“Government policies have weakened the constitution of our economy and reduced corporate immunity. Raising the minimum wage is not a problem if the virtuous cycle goes well, but the organism of the economy does not roll in the desired direction. Those who are hit first by raising the minimum wage are the self-employed. The 52-hour work week was good for improving the quality of life, but it did not work as expected. Responsible authorities need to revise their policies when dysfunction occurs, but there has been no change in stance. So at the time of Corona19, our economy was less immune and suffered from underlying disease.”
Hunger is more scary than viruses
He compared this crisis to the past two crises.
“Even if we use stimulus measures, it can be a different outcome than the 2008 financial crisis or the 1998 IMF crisis, which had been restored to the V-shape. It is difficult to maximize the net function of companies by pouring out stimulus measures in a state of contraction. The Corona 19 situation should be an opportunity to improve the constitution of our economy and strengthen our health.”
At the end of the interview, the former director expressed concern that “if we do not change policy, our national economy could shrink considerably in the post-corona era.” He then desperately asked, “Should i avoid it?” For Zhang Samisa, hunger is more frightening than viruses. This is why the regime urgently needs to check its policy effectiveness.Jeon Gwang-woo : “If economic policy does not change, the coroner’s stimulus measures will be useless”Best Recommended News
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