By Oh Young-jin
Assistant Managing Editor
First, congratulations for Prof. Paul Krugman becoming a Nobel laureate. I am sure Krugman's early work is still affecting the formation of our zeitgeist. But I am thankful for his prescient columns to The New York Times.
Speaking of his Princeston-datelined columns, one column and, more specifically the last paragraph in his May 12, 2008 column, titled, ``The Oil Nonbubble,'' still remains stuck in mind. In it, he says, ``I wouldn't be surprised to see the oil prices dip in the near future ― although I also take seriously Goldman Sachs' recent warning that the price could go up to $200.''
Give some ardent parsing to this paragraph and it would be made plain that the author shows a high degree of hedging skills. First, he makes himself sound like he's prophesying about the future of oil price movements, especially when the world is eager to know whether they will continue their vertical trip. Then, he hedges against himself by alluding to Goldman Sachs' previous forecast of $200 per barrel in two years.
I wonder what the Nobel prize-winning economist would say in his future oil price-related column, considering Sachs' latest forecast that the oil prices will go down to $107 by the end of next year (I would be surprised to see Krugman write about the oil prices in the near future, although I also take seriously George Soros' recommendation for Treasury Secretary Henry Paulson how to implement the troubled asset rescue relief program or Tarp).
Lampooning Krugman? No. My point is that nobody is perfect and that, even to those who sound better than others, predicting the future with accuracy is like trying to build the tower of Babel only to see it crumble ― but nonetheless is obviously tempting.
By this context, Paulson can be excused from allegations that he was to blame for triggering a financial avalanche by letting go of Lehman Brothers. Not that he can afford to divert his attention from cleaning up the mess on Wall Street, while preventing the contagion from further spreading into the Main Street and the rest of the world.
Paulson's handling of Lehman looked justifiable at that moment. Bear Stearns was handed over to JP Morgan in a shotgun marriage. Rescuing Lehman would have sent a wrong message to fat cats on Wall Street and Joe Six-packs on Main Street. Ditching Lehman leaves a just enough strong dose of anti-dote against moral hazards, telling them that you must get your act together or next time it might be you.
Of course, Paulson's course of action may even be lauded, if the mess we are all in ― Americans, Europeans and Japanese as well as Koreans ― is cleaned up well. There have been good signs that Americans are giving up their pretense of being the ultimate capitalists doing the job with the rest of the world merely giving a hand. When this column went to press, Dow had gained about 1,000 points or a quarter of record losses seen the previous week. Optimism is as contagious as pessimism, I hope.
Even if the current financial crisis were successfully wrapped, its ramifications would certainly ensue. So many noir economists have painted an equally bleak picture.
But what about changes in the world leadership?
The irony is that U.S. leadership has been strengthened as a result of the financial crisis.
Before the financial crisis, distrust in American leadership peaked with a war of civilizations triggered on justifiable grounds after 9/11 but degenerated into a personal vendetta of sorts. Now the disgruntled world is being spooked back on their toes behind the U.S.
Fear proves to be as effective as threats of nuclear weapons, as the dollar does as a last store of value. U.S. actions carry a veiled threat to the magnitude of MAD or mutually assured destruction in the nuclear era ― ``When I go down, so will you.'' Cantankerous Europeans got that message instantly, with the exception of Russian President-turned-Prime Minister Vladimir Putin, who needed some clobbering to oblige when he resisted. Stock market crashes were his Achilles' hill.
However, whether this fear-based leadership can be sustained is another question. First, there is China.
It wouldn't be any surprise if the Chinese are having a hard time suppressing their snickering at the U.S. being taken to task. All they have to see is a couple percentage points dropped in gross domestic growth for a year or two, while the U.S. is getting deeper into its indebtedness (Just think about which country has the greatest portion of U.S. government-issued IOUs and which country can afford to buy more!).
But China's time on the center of the global politics may need some more waiting, considering its uncouth political leadership quality and other problems that it will face as its economy matures.
While the rest of the world is preparing for the emergence of new world order, it is important to give the U.S. a chance. That country may prove that it is not what it used to be by opting for a chance. The world would be reassured, if Americans don't make the mistake of electing another Republican president in November. Remember the Coolidge-Hoover succession at the start of the 1929 Great Crash.
I watched with great interest a two-hour television special on the financial crisis on Sunday. The panelists talked about similarities and differences, which I don't need elaborate on. But Rep. Kim Jin-pyo of the opposition Democratic Party, made two points worth repeating.
Kim, who served as deputy prime minister in charge of economic policies in the previous liberal government, compared what is happening now with a conflagration in the bank headquarters, while the 1997 currency crisis with a fire in one of its branch. Kim's message is that effects of the latest great fire can be as devastating, if not more so, than 10 years ago.
Kim's second point is that banks, as part of the capitalistic establishment, seek to profiteer. In the lead-up to 1997 crisis, banks borrowed from abroad and lent at home, pocketing margins from different interest rates. Kim claimed that, if not properly unregulated, banks will fall into the same trap and ``mismatches'' in maturity of loans might give a cause for a run.
Kim also suggested that it was time to employ fiscal measures to boost the economy in other means than tax cuts pushed by the current government. Despite a slight political bias in his suggestion, it is worth a try, considering exports will likely reduce for some time to come, necessitating a boost in domestic spending in order to sustain growth.
But the best piece of advice was given by a bespectacled economist who used to work for the Federal Reserve Bank of San Francisco. ``I went to Mt. Sorak this weekend and I suggest others do the same to see the mountains are beautiful this time of the year.'' Other participants in the debate dismissed it with laughter, but I took it as an exceptional cure for this whole ongoing crisis in which everybody finds himself engrossed in. I remind myself of an old chess saying: ``Long-considered moves often prove to be the worst moves.'' Besides, give Paulson some time alone to figure the whole thing out.