The Korea Times
amn_close.png
amn_bl.png
National
  • Politics
  • Foreign Affairs
  • Multicultural Community
  • Defense
  • Environment & Animals
  • Law & Crime
  • Society
  • Health & Science
amn_bl.png
Business
  • Tech
  • Bio
  • Companies
amn_bl.png
Finance
  • Companies
  • Economy
  • Markets
  • Cryptocurrency
amn_bl.png
Opinion
  • Editorial
  • Columns
  • Thoughts of the Times
  • Cartoon
  • Today in History
  • Blogs
  • Tribune Service
  • Blondie & Garfield
  • Letter to President
  • Letter to the Editor
amn_bl.png
Lifestyle
  • Travel & Food
  • Trends
  • People & Events
  • Books
  • Around Town
  • Fortune Telling
amn_bl.png
Entertainment & Arts
  • K-pop
  • Films
  • Shows & Dramas
  • Music
  • Theater & Others
amn_bl.png
Sports
amn_bl.png
World
  • SCMP
  • Asia
amn_bl.png
Video
  • Korean Storytellers
  • POPKORN
  • Culture
  • People
  • News
amn_bl.png
Photos
  • Photo News
  • Darkroom
amn_NK.png amn_DR.png amn_LK.png amn_LE.png
  • bt_fb_on_2022.svgbt_fb_over_2022.svg
  • bt_twitter_on_2022.svgbt_twitter_over_2022.svg
  • bt_youtube_on_2022.svgbt_youtube_over_2022.svg
  • bt_instagram_on_2022.svgbt_instagram_over_2022.svg
The Korea Times
amn_close.png
amn_bl.png
National
  • Politics
  • Foreign Affairs
  • Multicultural Community
  • Defense
  • Environment & Animals
  • Law & Crime
  • Society
  • Health & Science
amn_bl.png
Business
  • Tech
  • Bio
  • Companies
amn_bl.png
Finance
  • Companies
  • Economy
  • Markets
  • Cryptocurrency
amn_bl.png
Opinion
  • Editorial
  • Columns
  • Thoughts of the Times
  • Cartoon
  • Today in History
  • Blogs
  • Tribune Service
  • Blondie & Garfield
  • Letter to President
  • Letter to the Editor
amn_bl.png
Lifestyle
  • Travel & Food
  • Trends
  • People & Events
  • Books
  • Around Town
  • Fortune Telling
amn_bl.png
Entertainment & Arts
  • K-pop
  • Films
  • Shows & Dramas
  • Music
  • Theater & Others
amn_bl.png
Sports
amn_bl.png
World
  • SCMP
  • Asia
amn_bl.png
Video
  • Korean Storytellers
  • POPKORN
  • Culture
  • People
  • News
amn_bl.png
Photos
  • Photo News
  • Darkroom
amn_NK.png amn_DR.png amn_LK.png amn_LE.png
  • bt_fb_on_2022.svgbt_fb_over_2022.svg
  • bt_twitter_on_2022.svgbt_twitter_over_2022.svg
  • bt_youtube_on_2022.svgbt_youtube_over_2022.svg
  • bt_instagram_on_2022.svgbt_instagram_over_2022.svg
  • Login
  • Register
  • Login
  • Register
  • The Korea Times
  • search
  • all menu
  • Login
  • Subscribe
  • Photos
  • Video
  • World
  • Sports
  • Opinion
  • Entertainment & Art
  • Lifestyle
  • Finance
  • Business
  • National
  • North Korea
  • 1

    Song Joong-ki marries British woman, expects baby

  • 3

    K-pop releases for February

  • 5

    Koreans reluctant to unmask on first day of eased indoor mask rule

  • 7

    Stock-leveraged investments rise again amid bullish KOSPI

  • 9

    Itaewon music fest brings love to the healing process

  • 11

    Busan seeks to take lead in expo race after BIE's April visit

  • 13

    Hybe acquires 56.1 percent stake in AI sound startup Supertone

  • 15

    Retailers seek to bolster beauty product sales as lifting of mask mandate approaches

  • 17

    NK slams NATO chief's Seoul visit as 'prelude to war'

  • 19

    Smiling flower, mushroom bomb, zombie: What do Takashi Murakami's grotesquely 'kawaii' creatures tell us?

  • 2

    Korean Lunar New Year vs. Chinese Lunar New Year

  • 4

    Over 76% of South Koreans support development of nuclear weapons

  • 6

    Base taxi fare to rise by 1,000 won to 4,800 won next month

  • 8

    ANALYSISPandemic awakens demand for data-driven automation

  • 10

    SPC opens 120th Paris Baguette store in US

  • 12

    Most people masked up on 1st day of lifting of mandate rules

  • 14

    Cute canine film 'My Heart Puppy' reunites Yoo Yeon-seok, Cha Tae-hyun

  • 16

    Biohealth geared for growth

  • 18

    INTERVIEWProduction company AStory expects great success with 'Extraordinary Attorney Woo' franchise

  • 20

    20 suggestions to improve Google Scholar and motivate global scholars

Close scrollclosebutton

Close for 24 hours

Open
  • The Korea Times
  • search
  • all menu
  • Login
  • Subscribe
  • Photos
  • Video
  • World
  • Sports
  • Opinion
  • Entertainment & Art
  • Lifestyle
  • Finance
  • Business
  • National
  • North Korea
National
  • Politics
  • Foreign Affairs
  • Multicultural Community
  • Defense
  • Environment & Animals
  • Law & Crime
  • Society
  • Health & Science
Wed, February 1, 2023 | 09:33
Today`s Column
Who Killed Wall Street?
Posted : 2008-10-12 16:43
Updated : 2008-10-12 16:43
Print PreviewPrint Preview
Font Size UpFont Size Up
Font Size DownFont Size Down
  • facebook
  • twitter
  • kakaolink
  • whatsapp
  • reddit
  • mailto
  • link


By Dani Rodrik
Project Syndicate

CAMBRIDGE ― You don't have to break a sweat to be a finance skeptic these days. So let's remind ourselves how compelling the logic of the financial innovation that led us to our current predicament seemed not too long ago.

Who wouldn't want credit markets to serve the cause of home ownership? So we start by introducing some real competition into the mortgage lending business. We allow non-banks to make home loans and let them offer creative, more affordable mortgages to prospective homeowners not well served by conventional lenders.

Then we enable these loans to be pooled and packaged into securities that can be sold to investors, reducing risk in the process. We divvy up the stream of payments on these home loans further into tranches of varying risk, compensating holders of the riskier kind with higher interest rates.

We then call on credit rating agencies to certify that the less risky of these mortgage-backed securities are safe enough for pension funds and insurance companies to invest in. In case anyone is still nervous, we create derivatives that allow investors to purchase insurance against default by issuers of those securities.

If you wanted to showcase the benefits of financial innovation, you could not have come up with better arrangements. Thanks to them, millions of poorer and hitherto excluded families became homeowners, investors made high returns, and financial intermediaries pocketed the fees and commissions.

It might have worked like a dream ― and until about a year and a half ago, many financiers, economists, and policymakers thought that it did.

Then it all came crashing down. The crisis that engulfed financial markets in recent months has buried Wall Street and humbled the United States.

The near $1 trillion bailout of troubled financial institutions that the U.S. Treasury has had to mount makes emerging-market meltdowns ― such as Mexico's ``peso" crisis in 1994 or the Asian financial crisis of 1997-98 ― look like footnotes by comparison.

But where did it all go wrong? If our remedies do not target the true underlying sources of the crisis, our newfound regulatory zeal might end up killing useful sorts of financial innovation, along with the toxic kind.

The trouble is that there is no shortage of suspects. Was the problem unscrupulous mortgage lenders who devised credit terms ― such as ``teaser" interest rates and prepayment penalties ― that led unsuspecting borrowers into a debt trap?

Perhaps, but these strategies would not have made sense for lenders unless they believed that house prices would continue to rise.

So maybe the culprit is the housing bubble that developed in the late 1990s, and the reluctance of Alan Greenspan's Federal Reserve to deflate it. Even so, the explosion in the quantity of collateralized debt obligations and similar securities went far beyond what was needed to sustain mortgage lending.

That was also true of credit default swaps, which became an instrument of speculation instead of insurance and reached an astounding $62 trillion in volume.

So the crisis might not have reached the scale that it did without financial institutions of all types leveraging themselves to the hilt in pursuit of higher returns.

But what, then, were the credit rating agencies doing? Had they done their job properly and issued timely warnings about the risks, these markets would not have sucked in nearly as many investors as they eventually did. Isn't this the crux of the matter?

Or perhaps the true culprits lie halfway around the world. High-saving Asian households and dollar-hoarding foreign central banks produced a global savings ``glut," which pushed real interest rates into negative territory, in turn stoking the U.S. housing bubble while sending financiers on ever-riskier ventures with borrowed money.

Macroeconomic policymakers could have gotten their act together and acted in time to unwind those large and unsustainable current-account imbalances. Then there would not have been so much liquidity sloshing around waiting for an accident to happen.

But perhaps what really got us into the mess is that the U.S. Treasury played its hand poorly as the crisis unfolded. As bad as things were, what caused credit markets to seize up was Treasury Secretary Henry Paulson's refusal to bail out Lehman Brothers.

Immediately after that decision, short-term funding for even the best-capitalized firms virtually collapsed and the entire financial system simply became dysfunctional.

In view of what was about to happen, it might have been better for Paulson to hold his nose and do with Lehman what he had already done with Bear Stearns and would have had to do in a few days with AIG: save them with taxpayer money. Wall Street might have survived, and U.S. taxpayers might have been spared even larger bills.

Perhaps it is futile to look for the single cause without which the financial system would not have blown up in our faces. A comforting thought ― if you still want to believe in financial sanity _ is that this was a case of a ``perfect storm," a rare failure that required a large number of stars to be in alignment simultaneously.

So what will the post-mortem on Wall Street show? That it was a case of suicide? Murder? Accidental death? Or was it a rare instance of generalized organ failure? We will likely never know.

The regulations and precautions that lawmakers will enact to prevent its recurrence will therefore necessarily remain blunt and of uncertain effectiveness.

That is why you can be sure that we will have another major financial crisis sometime in the future, once this one has disappeared into the recesses of our memory. You can bet your life savings on it. In fact, you probably will.

Dani Rodrik, professor of political economy at Harvard University's John F. Kennedy School of Government, is the first recipient of the Social Science Research Council's Albert O. Hirschman Prize. His latest book is ``One Economics, Many Recipes: Globalization, Institutions, and Economic Growth." For more stories, visit Project Syndicate (www.project-syndicate.org).
 
Top 10 Stories
1Korean Lunar New Year vs. Chinese Lunar New Year Korean Lunar New Year vs. Chinese Lunar New Year
2US bill introduced to honor Korean War hero US bill introduced to honor Korean War hero
3South Korea, US to expand size and content of joint military drillsSouth Korea, US to expand size and content of joint military drills
4Popular travel YouTuber recalls painful memories of being bullied at school Popular travel YouTuber recalls painful memories of being bullied at school
5Samsung refuses to cut chip output despite plunging profitsSamsung refuses to cut chip output despite plunging profits
6Holy Moly concert series brings 4 punk bands to Haebangchon Holy Moly concert series brings 4 punk bands to Haebangchon
7Cyber University of Korea offers online Korean language programs for foreignersCyber University of Korea offers online Korean language programs for foreigners
8IMF slashes Korea's 2023 economic growth outlook to 1.7%IMF slashes Korea's 2023 economic growth outlook to 1.7%
9Yonsei University global forum Yonsei University global forum
10Korea Exchange to toughen rules against unfair traders Korea Exchange to toughen rules against unfair traders
Top 5 Entertainment News
1Song Joong-ki marries British woman, expects baby Song Joong-ki marries British woman, expects baby
2K-pop releases for February K-pop releases for February
3Itaewon music fest brings love to the healing process Itaewon music fest brings love to the healing process
4Cute canine film 'My Heart Puppy' reunites Yoo Yeon-seok, Cha Tae-hyun Cute canine film 'My Heart Puppy' reunites Yoo Yeon-seok, Cha Tae-hyun
5[INTERVIEW] Production company AStory expects great success with 'Extraordinary Attorney Woo' franchise INTERVIEWProduction company AStory expects great success with 'Extraordinary Attorney Woo' franchise
DARKROOM
  • Nepal plane crash

    Nepal plane crash

  • Brazil capital uprising

    Brazil capital uprising

  • Happy New Year 2023

    Happy New Year 2023

  • World Cup 2022 Final - Argentina vs France

    World Cup 2022 Final - Argentina vs France

  • World Cup 2022 France vs Morocco

    World Cup 2022 France vs Morocco

CEO & Publisher : Oh Young-jin
Digital News Email : webmaster@koreatimes.co.kr
Tel : 02-724-2114
Online newspaper registration No : 서울,아52844
Date of registration : 2020.02.05
Masthead : The Korea Times
Copyright © koreatimes.co.kr. All rights reserved.
  • About Us
  • Introduction
  • History
  • Contact Us
  • Products & Services
  • Subscribe
  • E-paper
  • RSS Service
  • Content Sales
  • Site Map
  • Policy
  • Code of Ethics
  • Ombudsman
  • Privacy Statement
  • Terms of Service
  • Copyright Policy
  • Family Site
  • Hankook Ilbo
  • Dongwha Group