At Stake Is How to Shut Off Aftereffects

Two large U.S. investment bank collapses Sunday caused not just shock but some relieved feelings that the inevitable has finally come.

As expected, domestic financial markets could not avoid the panic phenomenon sweeping the world, with the stock market plunging 6.1 percent and local currency recording its steepest drop in almost 10 years against the U.S. dollar.

Stock analysts have long said, however, ``Well-known bearish factors cannot be bad if they can be anticipated." It is not certain if this market theory can apply to the once-in-a-century financial turmoil, but investors have few other choices but to cross their fingers it can.

The U.S. financial authorities' decision to let Lehman Brothers sink and Merrill Lynch fall to the hands of a new owner was reassuring in two ways in this regard ― Washington thinks the market can endure this turmoil and that it would no longer condone the moral hazards of market players.

Now it seems to be up to governments to minimize the aftereffects of the financial tsunami, as shown by the swift liquidity injection by the U.S., European and Japanese central banks as well as the interest rate cut by the Bank of China.

So it is only natural that government officials, financial regulators and central bankers have formed an ad hoc team to check daily market trends and discuss all possible steps in case of an emergency.

There still remain some causes for concern, however, as shown by the rather belated and incorrect responses these officials have shown lately.

A case in point is their recent delay or abandonment to issue dollar-denominated foreign currency stabilization bonds worth $1 billion. Government officials said, ``There is no need for hurry, as the government's bond issuance in unfavorable terms would adversely affect private borrowers, too." They may be right, but the problem lies in the fact officials didn't know of the unfavorable situation before they met overseas investors, indicating their ignorance of market trends abroad.

Some analysts express optimism that the ongoing turmoil will prove to be a blessing in disguise in the long run, because of the less uncertainties in the market and expanded chances for cash-rich Korean institutions to tap the U.S. markets on fire sale. This would make sense only when then the government and private sector are able to tide over the current difficulties by making a correct analysis of the current situation, the precise forecast of things to come and taking right measures at the right time.

Seoul's track record so far, however, is less than assuring, as shown by the Korea Development Bank's abortive attempts to take over the ill-fated Lehman Brothers under the tacit encouragement of the government, which changed minds only at the 11th hour.

More worrisome is the effect the financial turbulence will have on the broader economy, already reeling under slowing exports and sagging domestic demand. Particularly vulnerable to the external shock will be the small- and medium-sized businesses suffering from perennial fund shortages.

What the Lee Myung-bak administration should pursue is neither the ``7-4-7" vision of high growth nor the long-term strategy of ``green growth" but help to keep the large number of small firms afloat and ease the economic pains of working class families.

Hit by the one-two punches of high oil prices and financial high wave, Korea's economy is increasingly looking like a vessel caught in a perfect storm. The government's foremost duty is to navigate it to a safe port.