Drastic Steps Needed to Resuscitate Economy

By Kim Jae-kyoung

Staff Reporter

The global economy is heading further south at a growing pace, and there are two words highlighting what's happening in the global economy and financial markets ― ``recession'' and ``recoupling.''

Battered by the fallout from the global credit crisis, the U.S. economy is now slipping into recession, driving other major economies into a hard landing; evidence of the re-coupling of the rest of the world to the U.S. plunge.

This is the worst economic downturn the world has witnessed since the Great Depression in 1929.

But its depth and impact seems much bigger and wider as the economies of the world are much more interlinked now than they were in 1929.

``All economies right now face very serious recession scenarios because financial systems everywhere are not providing support to the real economy. And the financial system is even removing credit that is already supporting the real economy because they have deep and serious problems of their own,'' Market Force Company CEO James Rooney said in an interview with The Korea Times.

``Unless new and strong measures are taken to get money directly to the real economy participants and not just providing bail-outs to the financial players, this problem can spiral worse and worse out of control,'' he added.

In the eyes of Rooney, Korea is not on a better footing than other major economies. He said that the financial markets in Korea are not functioning and it is facing the great risk of undergoing a severe economic downturn. He explained the seriousness of a liquidity crunch here by likening the financial system to our body.

``Money, money flows, and access to credit are like the blood and bloodstream of our economic system. And right now no matter how hard the heart ― as in the government and the central bank ― may wish to push, it cannot get the blood to keep flowing throughout the economic body through traditional channels, and it certainly cannot get the fresh blood to where it is most needed in this time of crisis,'' he said.

He claims that unless the Korean government and central bank come up with more drastic measures right away, chances are that Asia's fourth largest economy could face severe economic challenges.

``Although the problems were not made in Korea, the consequences are already impacting us deeply,'' Rooney said, citing the exchange rate, the difficulties of banks to manage their credit from overseas and the difficulty of exporters and importers to get trade financing.

``There is a serious risk of a global economic `death spiral' that will contract economic activity beyond anything that we can imagine,'' he added. ``Serious work is needed to stop this from happening, and I do not see any of the necessary actions happening yet.''

``This matter is extraordinarily urgent. If it is not resolved within a very short period of time, the economy ― just like our hypothetical patient without his blood flow ― will lose consciousness and start to seize up, beyond anything that has been imagined or discussed so far,'' he said.

His view over the current liquidity condition in the local financial sector is much more serious than those of policymakers and central bankers.

``In my view, the banking sector has already been in crisis for three months now. Because of its own difficulties and the problems that cause for their management systems, the banking sector has now effectively stopped functioning as a source of capital for the real economy,'' he said.

``As a consequence, the real economy is now reaching a crisis,'' he added. ``Money flow has become frozen, and many financial players feel pressure to withdraw capital from the economy rather than increase capital supply.''

Unprecedented Difficulties

In a desperate bid to minimize the economic downturn, governments across the globe have taken unprecedented actions, such as public fund injections and direct liquidity supply.

Rooney remains positive over the government's move to inject public funds, saying that given that the economy is in unprecedented difficulties, the administration should not stick to traditional tools but find more drastic ways to boost the stagnant economy.

``In these current circumstances, there is little that the government can do by using traditional tools of intervention. They just do not work,'' he said.

``Instead, it seems to me that the government is probably going to have to find ways to directly supply credit to real economy market participants, such as direct lending to individuals and businesses,'' he added.

He pointed out that there is now a real argument that governments have to directly take over the role of banks in providing ordinary credit in the real economy but nobody is even talking about this.

``The government may have to take over the running of the banks, to override the management systems and structures that are causing them to retreat from the market,'' he said.

``But there is no paradigm available to show how this should be done and even if this were done, it is an extraordinary task to imagine and practically execute,'' he added.

He stressed that Korea should make all-out efforts to find the solutions at a local level, so it has to start by fixing the problems at home rather than waiting for some international solution to come along and help us.

Fundamental Weakness

Despite the government's series of measures, the liquidity crunch here is deepening, as credit is not made available to corporations with local lenders reluctant to lend on fears of weakening capital base.

Recently, President Lee Myung-bak said that strict BIS ratio rules and accounting standards are restricting banks' lending to viable but temporarily-struggling firms, calling for the relaxation of such rules.

Rooney, who is also vice chairman of Seoul Financial Forum, said that Lee's diagnosis of the symptoms is correct but easing BIS rules is not the fundamental solution.

``President Lee is observing the symptoms correctly. But the problem is not directly with the BIS ratios. They are only an indicator that something much deeper is wrong with the nature and structure of our traditional financial systems,'' he said.

``Attempting to solve the problem through adjustment or relaxation of BIS ratios is not likely to bring us the desired solution,'' he added. ``It may even further obscure the real problems that actually need serious attention and the development of a better economic model.''

He pointed out that the fundamental weaknesses of the traditional financial system have been unfortunately revealed because of inappropriate practices that have become widespread for most banking institutions in the world.

``Many wholesale banks relied upon financial market loans and bonds to expand their balance sheet instead of building up their assets from traditional customer deposits,'' he said.

``Even if the bank's assets are stable, a reduction in the bank's liabilities caused by the inability to roll over debts or issue bank paper or bonds can cause just as serious a crisis as the unexpected withdrawal of cash by bank depositors,'' he added.