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The U.S. government has decided to inject $700 billion in fresh public funds to deal with the recent financial crisis. It has spent more than $1.3 trillion if you include the bailout funds that went into state-run mortgage lenders Fannie Mae and Freddie Mac following the subprime mortgage crisis. The seriousness of the situation can be measured by comparison with the mere $123 billion of public funds spent during the savings and loans insolvencies in the late 1980s.
What is so serious is that it¡¯s too early to say that the worst is over. Washington may have bought more time to bring things back to normal, but there is no telling what variable may emerge next. The danger still exists of the flames of the financial crisis spreading to the real economy. America¡¯s fiscal deficit has increased radically due to the injection of public funds, and this could shake confidence in Treasury bonds and the U.S. dollar, holding back global growth.
Former Fed chairman Alan Greenspan, touted as the ¡°economic president¡± of the world, said the worst of the credit crisis was either over or would end soon. But Greenspan changed his words after the bankruptcy of Lehman Brothers, saying this was a major crisis that could happen once every 100 years and that more major financial institutions could collapse. Financial experts around the world, who are at the epicenter of the quake, are finding it difficult to predict the unfolding events of this crisis.
Our government has its hands full simply trying to keep up with the latest developments in its stock and foreign exchange markets, which are reeling violently each day, let alone come up with preemptive measures to protect our economy from global uncertainties.
The question is whether our government¡¯s risk management system is working properly. President Lee Myung-bak said recently that Korea has a fully equipped financial supervisory system that allows it to minimize the damage during crisis. But the reality is just the opposite. The government has unified under the Financial Services Commission the domestic finance operations that used to be shared by the former ministry of finance and economy and the Financial Supervisory Commission. Instead, international finance operations such as foreign exchange and overseas debt have been assigned to the Ministry of Strategy and Finance. The aim was to bolster the efficiency and quality of Korea¡¯s financial policy, but in reality the forced division of domestic and overseas operations was the result of squabbling between different government ministries over which areas they would control.
As a result, there is no single ministry that can handle this type of situation, when a U.S.-triggered financial crisis directly jolts Korean markets. The September crisis rumors that surfaced recently worsened while the Ministry of Strategy and Finance and the FSC wasted time passing the blame to each other. Although it may be difficult to take preemptive measures against unexpected developments, responsive measures must be implemented properly. The government should use this temporary calm in the storm to improve weaknesses in its risk-management system.
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