Pssst, Want A Quick Loan?

Over the past few years I’ve been pretty close to the public releases of a lot of Korean banks. A lot of things are only hinted at, and I have no audit authority to dig for deeper disclosure. That said, I’m just going to say what I think is going on.

Since the start of the financial crisis, the Korean government has given the banks money to distribute to average people who have fallen on hard times. Although some banks are wholly or largely owned by the government, it seems that all of the banks get in on the windfall to some degree. The money counts as bank capital, so it does bolster the balance sheets of the banks. There are strings attached, though, in that the banks have to supply a significant part of the money to: old people living alone, low-income families, multicultural families (the iconic rural farmers with Vietnamese brides), and teen heads of households. In other words, these ‘loans’ are irrecoverable from the moment they’re written. They are not, however, recorded as bad debt – they’re carried as normal retail loans in good standing. Another good chunk of money is distributed to the SME/SOHO sector (that is, small and mid-size companies, and small office/home office self-employed people). These count as business loans, although since the value is usually between $500 and $5000, they’re essentially personal loans to individuals. Again, this isn’t really about capital lending to finance expansion of small businesses, so much as it’s about keeping everyday people afloat. For one of the large banks, the total of these operations would come to less than $100million per year. Across the whole banking sector I’m guessing – totally guessing – that it’s been under $5billion since the start of the financial crisis, but it would be hard to draw a clear line between charity and genuinely rational small business loans in many cases.

Now, when I look at what the banks are reporting as their bad debt ratios, these amounts are ludicrously small, less than 1%. Either the bad debt has been packaged and taken off balance sheet (unloaded to the government), or else it’s just being carried on balance sheet, without the banks’ being forced to recognize uncollectible loans – yet. Theoretically, as long as a company still exists or a person is still alive you could keep extending the maturity of their loans. My guess is that the only ones being recognized now are dead construction projects where the debtor is a property development company that has literally ceased to exist, and no other company has purchased the project rights, leaving no way any accounting magician could possibly classify the loan as ‘current’.

What strikes me about this system is how much sense it makes. Sure, the banks are weak, everyone’s banks are weak. What did the US do when its banks were weak? Give them a blank check for $12 trillion, about $36,0000 per American. No strings attached and no prosecutions for fraudulent representations. Also note that US banks don’t really do anything tangibly productive with their money – they keep it all in the financial markets where they just bid against each other to force up the prices of stocks, bonds and financial instruments, playing chicken with one another until someone realizes that the asset price inflation isn’t actually tied to any productive enterprise, and prices crash. No problem – the Fed will pump endless capital back into the banks to let them do it all over again.

In Korea, no doubt, the banks extend a lot of loans to the chaebol. But – and this is important – the chaebol actually make shit. Say what you want about their governance, they have real factories and real R&D labs and they make stuff that the rest of the world is willing to buy. That’s why the Korean won is strong. America, on the other hand….smoke and mirrors. Oh, sorry. And Detroit automobiles.

Yes, there was bubble-popping in Korea, too, and the Korean government has allowed its banks not to recognize some losses – just like America. The Korean gov’t has pumped capital into banks, just like America. But the Korean government has made the banks earn it – it has used their infrastructure, their branch networks, sales staff, credit evaluation experts and loan review officers to help distribute a few billion dollars to everyday people. If my guess is right, that operation has cost about $100 per Korean citizen.

For a cost of $100 per person, the Korean government has provided support to the whole economy, helping to keep your neighborhood dry-cleaner going, with all the tiny little trickle-down effects that has. For a cost of $34,000 per person the American government has given verifiably criminal enterprises the right to continue manipulating markets in such a fashion as to concentrate profits, concentrate risk, and offload losses onto the people they have chained into debt peonage.

Korea’s solution just makes so much more sense. Losses cannot be covered up forever, though, and there’s only two ways to resolve them: recession or inflation. For the US, I’m betting on a long recession. For Korea, there’s no reason to go into recession as long as they can keep exporting. I think they can – so I’d say don’t be shy about demanding raises. Inflation is a long-time partner of the Korean economy: there’s a reason Korean money has so many zeros behind it, what’s a couple more?