Questionnaire 1. Sub prime mortgage crisis Do you see the current financial crisis has risen from reckless and excessive investment by the banks, such as Lehman Brothers and Merrill Lynch? Or is it already anticipated by longstanding low interest rate policy for the past 8 years by the Bush administration? ANSWER: Everyone is to blame for the current debacle. Bankers took excessive risks because regulators and easy money policies encouraged them to. Borrowers also engaged in risky behaviors because circumstances were ripe. The media failed us by playing cheerleader for the bubble. The Bush administration exacerbated the problem by running the country into its largest peacetime national debt in history. Average Americans also fueled the problem by borrowing to the hilt and neglecting to save. Finally, the educational system failed to teach bankers, borrowers, and regulators that asset bubbles always end badly, and sometimes catastrophically. As philosopher and poet George Santayana once noted, “Those who cannot remember the past are condemned to repeat it.” We are repeating the worst of it.
2. Bail out plan Do you see recent announcement of bail out plan which amounts to 700 billion dollars will resolve the crisis? Do you see that further measures, such as financial reform or tightening of financial-related regulations are necessary to resolve the crisis? ANSWER: Only time will tell. Bear in mind the $700 billion is only one part of the bailout. Individual companies have been bailed out and the Hope for Homeowners Program has promised $300 billion to distressed homeowners. John McCain, Glenn Hubbard, Robert Shiller, Martin Feldstein, myself, and others have developed alternative plans that would directly aid homeowners and could be implemented quickly if need be. If the Bush administration had not run up the national debt so high, additional plans could be created and monies to fund them allocated immediately. As it stands, the U.S. national debt is over $10 trillion and may well hit 100 percent of GDP before the end of the next president’s administration. Regulatory reform is definitely in the works. Whether the changes will be salutary or not cannot be foretold at present as they will almost certainly have to await the new administration. 3. Investment bank models As a result of recent financial crisis, only two out of many investment banks in Wall Streets have survived. Many Korean banks have regarded Wall Street investment banks as their role model for future strategy. However, these expectations have been crushed down due to fall-outs of Wall Street investment banks. Do you see that investment
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banks model is an inadequate bank model to be faded away from history? ANSWER: The U.S., though not necessarily Wall Street, is still home to numerous niche or boutique investment banks, and although they have changed charters Goldman Sachs and Morgan Stanley may continue to provide global leadership. The problem with Lehman and the other failed investment banks was not their strategies but rather their internal incentive systems, which encouraged excessive risk taking and valued shortterm gains over long-term stability. When they were private entities controlled by partners, investment banks were much more careful. Private equity firms may return us to that era or publicly traded investment banks may begin to defer executive compensation the way that mutual life insurers already do. This is an area where new regulations could prove helpful. 4. Recession There have been suspect that the recent financial crisis will put the U.S. economy in further recession. How long do you think that the U.S. recession will continue? ANSWER: Again, that is difficult to say at present as all the usual models do not apply. Japan has still not recovered from a similar crisis that occurred over 15 years ago. The Great Depression lasted about a decade in the United States and other asset bubble related recessions, like those that followed the Panics of 1819, 1837, and 1873, lasted for five or more years. The differences are that we have more domestic monetary policy discretion today because we are no longer on the gold standard and that we have an excellent leader in Ben Bernanke, who is clearly the best man for the job. 5. Spill over of U.S. recession The recession in the U.S. economy will inevitably affect on the Korean economy, as it is heavily dependent on the export to the U.S. market. To what extent, do you think, that the U.S. economic recession will affect the world economy? ANSWER: That will depend on the value of the dollar vis-à-vis other world currencies, like the won. If the dollar strengthens against the won, Korean goods will look inexpensive to Americans, many of whom will be eager for bargains. If it weakens, Korean goods will look expensive to Americans, who will accordingly buy fewer of them. 6. Dollars There has been an analysis that the power of Dollars as the world key currency will be declined, due to the recent financial crisis and the massive pumping of dollars by the U.S. administration for boosting liquidity. Do you see that the supremacy of Dollars might be falling?
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ANSWER: Yes, it is possible that the dollar could lose a significant part of its “market share” as an international currency. With financial panic now gripping the Eurozone, however, that threat has diminished over the last week. The Japanese yen and Chinese yuan may be the ultimate beneficiaries of the current crisis. 7. Responsibility of the U.S. economy There have also been suspects that the U.S. is trying to shovel its own burden to other countries by deliberately maintaining weak dollars, which will push the price of oil and commodity further up. What do you think on this? ANSWER: I don’t have sufficient information or contacts to confirm this. It seems more likely that the dollar is weak because the supply of them is large and demand for them is small, which makes sense given our huge trade deficit, burgeoning national debt, oversized federal government deficits, and our weakening economy. I should also note that when Americans complain about the exchange rate policies of other countries, especially Japan and China, they are told that it is the right of sovereign nations to determine the value of their own money if they wish.
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