By Kim Jae-kyoung
Staff Reporter
Among global investors and top policymakers, there have been mixed views over the future course of the U.S. credit crisis ― is it nearing the end or just entering the worst stage.
However, the recent collapse of two U.S. mortgage giants ― Fannie Mae and Freddie Mac ― has tipped the balance in favor of the pessimistic view that the crisis will send a shudder through the global economy and financial market.
The consequence of the U.S. credit crisis on the Korean economy and financial market hasn't become tangible yet but chances are that the crisis will result in the burst of the global property bubble, creating a ripple through the Korean economy.
Since the possible burst of the property bubble can dampen demand globally, it is likely to deal a fatal blow to the world's 13th largest economy, which is now growing only on external demand, the sole growth engine for the crippled economy.
Renowned global economists said collectively that the credit crisis is far from over and that the global economy will become infected in the near future. They warned that some major economies are slipping into recession.
``Unfortunately, the liquidity crisis that started last summer is far from over. In the U.S., it quickly turned into a liquidity crunch,'' Mauro F. Guillen, director of the Lauder Institute at the Wharton School of Business, told The Korea Times.
``The initial episode had to do with subprime mortgages, and with the securities linked to them. But it quickly spread to other markets, including the overnight banking market, which essentially collapsed,'' he added. ``This crisis quickly turned into a crisis of confidence.'
He explained that banks did not trust each other, as nobody was sure as to the secrets hidden in the other's balance sheets.
Guillen, who is an expert on the Korean economy, said that Korea would also be affected (by the U.S. credit crisis) just like many other economies, citing rising prices and stagnant export growth.
``There are upward pressures on prices, and growth is slowing down, especially because exports are not growing. Domestic real estate prices cannot go up, and credit has tightened,'' he said.
Former Morgan Stanley chief economist Andy Xie echoed the view, saying that macro implications of the crisis are weak dollar, high inflation and the burst of the property bubble.
``The crisis won't end with the collapse and bailout of Fannie Mae and Freddie Mac. More financial institutions like regional banks may fail,'' Xie wrote in the current issue of Caijing Magazine.
He pointed out that the U.S. government's lending directly to these two mortgage giants shows that the U.S. is printing money to bail out its financial system and, ultimately, monetize the losses from the property price decline.
He added that foreigners may share one-third of the cost through inflation and dollar depreciation, stressing that it is time for central banks in other countries to sell U.S. treasuries.
``Foreign investors should sell U.S. treasuries now to drive up the bond interest rate sky high, which would deter the Fed from printing money,'' he said.
``So far, international investors, mainly central banks, are scared stiff and don't know what to do. The U.S. is taking advantage of the opportunity to stuff the world with its losses,'' he added.
He also said that the U.S. had not had a large surge like in Asia in 1998, because it is a dollar debt bubble and the Fed can print to plug any hole in the short term
``Even the trouble on Wall Street is far from over. The death of Bear Stearns doesn't give everyone else the license to live. Several Wall Street institutions may be comatose already,'' he added, forecasting that in one year's time, Wall Street will have fewer players left standing
Xie, who is now working as an independent economist, predicted that the U.S. credit crisis will pierce the global property bubble, which will stoke inflation further.
``The financial crisis is causing global stagflation. The credit crisis bursts the property bubble, which depresses demand globally. At the same time, the Fed prints money to bail out the financial system,'' he said.
``When the money flows into the financial system, speculators use it to buy commodities like oil. Hence, the growth of money supply immediately turns into inflation for the whole world,'' he added.
In his contribution to South China Morning Post, Xie forecast that property prices may fall by one-third globally, and by half in many `hot' cities.''
In a recent interview with The Korea Times, Xie warned that Korea has become vulnerable to a massive property bubble as a result of growing stagflationary pressure.
``Korea may be experiencing a massive property bubble funded by debt. A decline of asset values and a rise of the consumer price index are a deadly combination,'' he said.