Considering the apparent lack professionalism at the Federal Reserve in the U.S., Korean “progressives” and their housing price bubble have a doppelganger.
-
English Books on Korea... and More!
-
Visit My Brother's Film Review Site
Problem, What Problem?
This entry was written by R. Elgin, posted on December 19, 2007 at 12:26 am, filed under Asides. Bookmark the permalink. Follow any comments here with the RSS feed for this post.
Post a comment or leave a trackback: Trackback URL.
10 Comments
The article is sensationalist and plumped up only with rumors. Do let me point out that the Savings and Loan crisis led to a huge bailout of banks, paid for by US taxpayer dollars, and that many of the remaining losses were borne by Average Joe small investors. In the current mess, thanks to those toxic waste CDOs that did in fact spread risk, it’s only the bank profits themselves, and the banks’ stockholders, that are taking the losses. The financial system is frozen now due to technical difficulties, but I think that will resolve very quickly. There is a LOT of money (liquidity) out in the world right now, and it won’t stay cooped up for long.
A look at today’s Joongang points to some problems all that money is causing right here at home. First, the prices of raw materials and intermediates that an exporting economy like Korea’s depends on are rising at 12% annually. Agricultural and energy products are up 40%.
http://joongangdaily.joins.com.....id=2884101
So prices are rising for business. What about the rest of us? Korea’s protectionist government just cut its tariffs on a whole whack of agricultural and seafood products - things normally taxed to protect local suppliers - in order to limit consumer inflation. It won’t work, food prices are climbing globally.
http://joongangdaily.joins.com.....id=2884100
But this one is best: the Korean government tried to sell bonds mostly worth about 6%, and it couldn’t find enough takers. This is like saying, you give me 100 bucks, and in a year I’ll give you back 106 bucks. The fact that this domestic issuance didn’t sell out means that people believe that the value of their money is eroding faster than 6%; meaning, that 106 dollars one year from now will be worth LESS in real terms than 100 dollars is today.
http://joongangdaily.joins.com.....id=2884093
What do you do when you have high inflation? If you’re a government, you fight it with high interest rates. Korea already has those. The trouble is, high interest rates strengten your currency. That hurts Korea’s exporters and prospects for growth. If you’re a consumer, you look for ways to make your money grow faster than inflation. That’s been happening, with people pulling their cash out of bank accounts to put it into the stock market or MMAs (which, in turn, lend it into the stock market), or HOUSES. This should mean rising prices for stocks and houses. This has been true for stocks, but the current government has intervened in the housing market more than plastic surgeons have intervened on Michael Jackson’s face, with similar results.
So, Koreans know a period of high inflation is coming. They aren’t allowed to compensate for it with rising home values. They can’t count on improving incomes, because the we rely on the exporters to provide growth here. So Koreans spend their own money to bid up the prices of their stocks. Foreign investors, knowing a good thing when they see it, happily sell their inflated stocks to the Koreans, which leads to more ill will because the foreigners made a profit here.
http://joongangdaily.joins.com.....id=2884109
You’re helpless. The policies of people you’ve never met are going to start hitting you in the following way: everything valuable you own is going to become less valuable, and there’s nothing you can do about it. You have only two hopes: 1) You get lucky enough to pick the right stock that will actually grow faster than 7% (a gamble), or 2), you have a job with income that will grow faster than 7%. In other words, envy the English teachers.
Yes, but this will have an impact upon the average American and their credit practices.
I also know that because of the falling dollar, many expatriates are having more trouble if they are paid in dollars. More are attempting to be paid in Euro or some other denomination since that dollar-euro transition is getting steeper.
I think the sub-prime problem is more than due to some misguided policies from the Fed. About a year or two ago a Chinese state-controlled company wanted to buy a major petroleum company in America, but the Americans said no, and an Arabic company wanted to buy a port company in America, and Americans said no, too. But the Chinese and the Arabs are the ones who have the cash now.
In the past they might have bought the Treasury Notes with almost all their surplus money, but after seeing what Singapore has done through Temasek and GIC(Government of Singapore Investment Corporation), they now want to own real assets rather than low-yielding treasuries.
I think America’s rather negative sentiment towards those two groups investing in America’s main assets might have affected the capital inflow to America from them, resulting in reduced liquidity in America which in turn caused the drop in the values of the dollar and the houses.
The problem is America has to bring in from overseas about $2 billion dollars every single day, but now even the American investors want to take the money out of the country because the prospect of getting a decent return in America isn’t very bright. Look at the Dow Jones Index, how long has it been there?
Actually no. America has had no problem financing its debt, as those same lenders you mention, plus others like Russia and Korea, have been more than willing to support the US’s spending. America is not lacking for capital or liquidity (except for those now-illiquid CDOs).
All that’s happening now is that way too many mortgages got approved, re-packaged, sliced up and sold on. But it was just financial institutions selling them to each other, taking fees, writing more mortgages and carrying on. The problems are twofold: (1) the ratings agencies totally dropped the ball on assessing how risky the CDOs were, which means now they’re widely dispersed and no one knows what they’re worth, and so (2) the world’s financiers don’t know who’s the most exposed.
A few banks have taken write-downs of up to 20 billion or so. Everyone knows that’s not enough yet. There’s a chance that a few banks might be really fucked, and because all the world’s banks are tied together, no one will lend until someone figures out the value of all those CDOs.
Second, the big holders of dollars have realized they won’t be able to go shopping for entire US companies. But they can buy up a lot of 5% stakes, and they can buy up a lot of African and Burmese resources.
While not exactly ethical investing, this does help disperse some of that money that would otherwise be building more pressure on Asian currencies, and driving up inflation in the developed world.
It looks like we’ve barely scratched the surface of Korea’s housing problem. According to the Financial Times theres the underpinnings for another IMF scale disaster, thanks to the banks loaning too much money, again. (I would send this stuff in for a blog tip, but you guys don’t seem to be monitoring those things anymore)
====================
http://www.ft.com/cms/s/1/afe0.....fd2ac.html
Korea’s liquidity squeeze
Published: December 17 2007 09:10 | Last updated: December 17 2007 19:38
Has the global credit crunch, having largely bypassed Asia, turned up in South Korea? With banks scrambling to secure funding and the three-month interbank rate at three-year highs, Korea’s financial system is displaying some eerily similar signs of stress.
Structurally, Korea is Asia’s most obvious port of call for credit jitters. Korean and Australian banks alone in the region lend far more than they pull in from depositors – Korea’s loan/deposit ratio stands at 130 per cent compared with 60-80 per cent in the rest of Asia. Dynamics have deteriorated as banks have stepped up lending (largely to small and medium-sized enterprises) and depositors have withdrawn savings. Commercial banks’ deposit base has been whittled back by 2 per cent so far this year, according to JPMorgan.
That has prompted banks to turn elsewhere for funding. Regulators were mercifully quick to crack down on overseas borrowing – the currency mismatch between assets and liabilities at banks contributed to the Asian financial crisis of 1997-98 – but that has added to the strain on domestic credit markets. Commercial banks, once stalwart buyers of bonds, are now themselves issuing short-term paper and debentures. Meanwhile, the traditional year-end tussle for funds and a more stringent enforcement of reserve requirement ratios is cranking up pressure. Finally, banks have been spooked by a $100m accounting loss suffered by Standard Chartered in Korea as a result of volatile interest rate swap markets.
Many of these factors are temporary. But others, including the decline in deposits, may prove more structural. Foreign investors now active in domestic bond markets are likely to turn tail if things become uglier in the US, while the banks’ lending binge will inevitably mean an uptick in provisioning next year. Even if Korean credit markets stay open, banks could find themselves forced to curtail lending.
Gold is a good inflation-hedge, some say… has risen well ahead of prices in the past 6 months. What is the best way to “buy gold” (shares? fund? actual metal?) here in Korea, as a savings-instrument…?
“Actually no. America has had no problem financing its debt”
In other words, America has had no problem with liquidity? Then why did Citi Bank executives have to fly to Middle East to find $7.5 billion lately?
Barbarian:
Think about it! America has no pressing problem with liquidity precisely because Middle Eastern and other players are still willing to step up and provide the funds.
Because Citi was one of those institutions with large exposure to subprime. Lehman Bros, HBC, there’s been a few biggies, but not many.
Maybe my choice of words wasn’t ideal. America has lots of money, it has the ability to attract lots of money. It’s temporarily frozen in place (yes, that means illiquidity), but I’m confident that they’ll figure out what to do with the CDOs very soon, and the spigots will open again. Remember, US interest rates are low and going lower; that is a clear indicator that liquidity is not a problem.
“So, Koreans know a period of high inflation is coming.”
Prices have been climbing for years. Except for home electronics, everything else seems to have doubled in price in the years I’ve been here.