By Yoon Sun-woo
Global Student Reporter
HONG KONG ― The year of 2008 will be remembered in terms of economic history for one of the most serious and widespread economic crises . Thousands of papers and research projects derived from this issue and policymakers severely struggled trying to find strategies to fix the problem.
Robert A. Mundell, a professor at Columbia University in New York City and the 1999 Nobel Laureate in Economic Sciences, was one of the economic academics who lost sleep over the matter.
He then was selected as the fifth professor at large at the Chinese University of Hong Kong and visited to give an inaugural lecture on the issue.
The unforgettable economic collapse began in September of 2008. Lehman Brothers filed for bankruptcy soon after the subprime mortgage crisis swept through the United States. And the global economy followed.
The liquidity crisis was a key factor. The U.S. government misread the bank sheet and it never anticipated the scramble for liquidity. In the course of the liquidity crisis, the European Central Bank took steps to resolve the situation before the Federal Reserve Bank ― lending 95 billion euros in one day.
A certain slowdown and recovery took place in the second quarter of 2008. The Federal Reserve Bank finally decided to appreciate the dollar by 25 percent against the euro and gold despite concerns over expected inflation. The overvalued dollar together with the failure of saving Lehman Brothers was a decisive factor in the following disastrous financial crisis.
Many scholars ascertained it was the revival of the 1929 Great Depression.
However, Mundell denied this with the proof that the unemployment rate did not soar as shown in 1929. In fact, it was more like the 1979-82 crisis when there was also a collapsing dollar and soaring gold price.
Then, what are the implications for the future international monetary system?
According to economic history, the concentration of money always has happened with the support of the great powers. For example, the founding of the Federal Reserve Bank in 1913 led to a concentration of money in the U.S. In 1944, Bretton Woods was the place where the great powers established their own currency policies. There, the International Monetary Fund (IMF) was founded to set up an anchored dollar standard.
The recent flow of the currency system can be defined as "regional unification."
In 1969, Mundell claimed to set up a European currency to avoid being overshadowed by the U.S. dollar, and, as he said, the euro is now the second largest currency in the international monetary system. He now ascertains the creation of a "dollareuro" currency that is a dollar-euro regional currency. An Asian currency area can be created too, so that the Asian currency would be fixed to the dollar-euro to provide stability to the currency region. The Asian currency area can be constituted within APEC regional borders, ASEAN regional borders or other kinds of regions.
More currency alliance would lead to a stable international monetary system and less policy mistakes.
When we recall the 1997 Asian economic crisis, 2008 sub-prime mortgage crisis and other historical economic fluctuations, we can find out that a stable currency system is a crucial factor in preventing future crises.
What Mundell mentioned at Chinese University of Hong Kong on Sept. 24, 2009, could be the answer to this everlasting problem.
swyoun―kr@hanmail.net
Yoon Sun-woo is a sophomore student majoring in economics at Seoul National University.
