By Kim Tae-gyu
Staff Reporter
The South Korean government is accused of employing an ill-fated strategy similar to a Ponzi scheme in order to prop up real estate prices in the midst of the financial crisis.
Prof. Lee Joon-koo at Seoul National University, arguably the most authoritative micro-economist here, said Wednesday that Seoul should stop such a risky bet.
``A seamless infusion of liquidity and real estate deregulation mark pivotal policies of the current administration designed to underpin the property market,'' Lee said.
``But the attempt is similar to a Ponzi scam because it is aimed at raising house prices via an injection of cash to the rich, which is unsustainable,'' he said.
Named after Charles Ponzi, a notorious U.S. swindler in the 1920s, a Ponzi scheme refers to a fraud of paying off initial investors with money coming in from new recruits.
There are no or little underlying businesses that create real cash flows. Hence, late investors are highly likely to lose all or part of their investments when the trick is discovered.
The infamous U.S. con artist Bernard Madoff was found to have resorted to the ploy in running his $50 billion fund. Korean outfits are also likely to be damaged due to the fraudster.
Prof. Kim Sang-jo at Hansung University concurs that the property market has a shot at causing a bubble.
``The stock market can be corrected when its price is considerably at variance with intrinsic values because there are multiple players including foreign investors on top of institutions and individuals,'' Kim said.
``For example, foreigners will exit if share prices rise too much. In comparison, the housing market is different because foreigners are not a factor. Based on the massive liquidity, the market runs a risk of creating a bubble due to people's herd behavior,'' Kim said.
His logic: Should the housing prices start to rise beyond the pre-crisis level, they may overshoot due to those who are wary of missing the boat.
According to Wikipedia, herd behavior refers to people's tendency to follow other people's actions in the market in an irrational way ― greed in the bubbles and fear in the crashes.
This is believed to play a role in a buying binge in the upturn, generating a bubble, and in panic selling during the slump causing a market collapse.