Intermediate Macroeconomics ECON 15575084

Intermediate MacroeconomicsECON15575084 Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” Day 15 卜安吉

Financial Crisis Spreads to Emerging Nations • As the global financial crisis has unfolded, many South Koreans feel they are reliving a nightmare. • South Korean stock markets and currency have dropped more than 30 percent since last summer as foreign investors have fled in droves. http://www.nytimes.com/2008/10/24/business/worldbusiness/24won.html?th&emc=th Intermediate Macroeconomics, Day 15

S. Korean Banks Rating agencies have raised concerns about the health of the nation’s banks. The problems are a chilling echo of a decade ago, when the Korean currency and economy collapsed during the Asian financial crisis. Intermediate Macroeconomics, Day 15

American “Contagion”? Once again, the Asian economic powerhouse appears threatened by an international financial contagion that began elsewhere. Last time, it started with the Thai baht. This time, the crisis began on Wall Street and has already claimed less wealthy countries like Iceland and Ukraine. Intermediate Macroeconomics, Day 15

Transparent and Open Economy Many South Koreans complain that their economy is vulnerable to Western market panic and destabilization because it is more transparent and open to foreign capital than those of neighboring Japan and China, who have so far survived the credit crisis unscathed. Intermediate Macroeconomics, Day 15

It’s not our fault! “We are collateral damage in a crisis that is not our doing,” said Park Yung-chul, a professor of international finance at Korea University in Seoul. “We live in an unfair world.” Intermediate Macroeconomics, Day 15

They are not the only ones. • Emerging markets around the globe have come under simultaneous pressure from the financial tsunami that started in the United States mortgage market. • South Korea’s vulnerability is an indication that the global financial crisis has reached a new level. Intermediate Macroeconomics, Day 15

The Asian Banks Their problem is not really insolvency but illiquidity. “International banks, because of their own problems, won’t lend to us,” Mr. Jung said. “We don’t face a solvency problem. We face a liquidity problem.” Jung Hyun-jin is an executive vice president in the bank’s financing market business unit at Woori Bank, one of South Korea’s largest lenders. Intermediate Macroeconomics, Day 15

Illiquidity: Run on the Bank! Intermediate Macroeconomics, Day 15

Parallels to 1929? LOOKING back at the events, it’s hard to avoid seeing parallels to the current situation. Today, as then, uncertainty has consumers spooked. By some measures, stock market volatility in recent days has reached levels not seen since the 1930s. Northern Rock in the U.K., 2007 Intermediate Macroeconomics, Day 15

Insolvency now! Illiquidity then! The Fed and the Treasury Department, intent on avoiding the early policy inaction that let the Depression unfold, have been working hard to keep credit flowing. But the financial situation they face is, arguably, more difficult than that of the 1930s. Then, the problem was largely a crisis of confidence and a shortage of liquidity. Today, the problem may be more a shortage of solvency, which is harder to solve. Intermediate Macroeconomics, Day 15

Intermediate Macroeconomics, Day 15

As I keep trying to tell you … Despite many advances in the tools of economic analysis, modern economists armed with the data from the time would not have forecast much better. In other words, even if another Depression were around the corner, you shouldn’t expect much advance warning from the economics profession. Intermediate Macroeconomics, Day 15

I am not predicting another Great Depression … …like IMF head Blanchard and N. Greg Mankiw, but as Greg said: You should take that economic forecast, like all others, with more than a single grain of salt. Intermediate Macroeconomics, Day 15

Intermediate Macroeconomics ECON 15575084