By Kim Tae-gyu
Staff Reporter
Countries from across the world are pulling out all the stops to revive the slumping economy via green stimulus packages, or pump-priming measures involving eco-friendly development.
The measures appear to be a legitimate means of economic recovery, but some observers warn that they may end up generating a ``green bubble'' over the long haul.
``After Long Term Capital Management (LTCM) tumbled in the late 1990s, the U.S. government channeled a huge amount of liquidity to the market, eventually leading to an info-tech bubble years later,'' said Kim Se-jung, an analyst at Shin Young Securities.
``Things are basically the same at the moment ― the world pumps liquidity to the market alongside stimulus schemes mainly related to green growth. It is fine at the moment but I am afraid the step may cause a green bubble in the long run,'' he said.
U.S. President-elect Barack Obama has promised to invest up to $150 billion in clean technologies and the United Kingdom aims to create 100,000 jobs via new projects focused on restraining carbon emissions.
Asian nations followed suit early last month by announcing their own versions of ``Green New Deal'' plans. Korea looks to invest 50 trillion won over the next four years in low-carbon infrastructure initiatives while Japan aims to create upside of 2 million jobs associated with environmental technologies.
``When the economy starts to recover, the abundant liquidity will be sure to generate a headache by causing prices of raw materials to soar,'' Kim said.
``That is the green bubble. Presently, we have no choice but to put concern on the back burner since the top priority is to invigorate the flagging economy. But we should not forget about it,'' he said.
On top of the LTCM example, Kim said Korea's drive to crank up demands in the early 2000s via credit cards is another example of a liquidity-bubble format. Back then, the country suffered a mini crisis due to the plastic card bubble.
Prof. Lee Joon-koo at Seoul National University concurs.
``An overly generous stimulus proposal may result in high inflation when the economy gets back on track,'' Lee said.
``Hence, the government should find out if the green stimulus schemes funded by taxpayers' money are reasonable. Otherwise, the LTCM case may reoccur,'' he said.
According to Wikipedia, LTCM was a hedge fund in the 1990s that invested in a host of risky financial vehicles boosted by overly high leverage.
The fund fared well on a unique investment strategy in the early years after its foundation in 1994, as amply demonstrated by annual returns of above 40 percent.
However, the fund lost $4.6 billion in less than four months in 1998 when the Asian financial crisis hit Russia, one of the major nations to which LTCM funneled money.
The huge loss led to a vast bailout plan arranged by the Federal Reserve. But it failed to stay afloat, folding in early 2000.
The Korean economy was likewise exposed to a series of bubble risks, including a property bubble and venture and dotcom bubble during the Kim Dae-jung administration from 1998 to 2002. When these burst, the economy endured serious consequences. Following trends and fashions without cool analysis is a risky, a painful lesson for Koreans and companies, a Seoul professor said.