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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
CAUSES
IMPACTS - FACTS and EVIDENCE
IMPLICATIONS
POLICY OPTIONS
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
US Housing Market Boom and bust in the housing market
Government policies: homeownership for all
Federal Reserves Policies of low interest ratepolicy
High-risk mortgage loans andlending/borrowing practices
Lack of Financial Regulation The Increased Debt/Capital Ratio of
Investment Banks
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
1994- NationalHomeownershipStrategy(NHS) was
initiated 1997- Taxpayer Relief
Act: up to US$250,000 exempted from
capital gains taxwhen you sell house
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
2003- AmericanDream DownpaymentAct: provided grants
to help first time homebuyers with downpayment and closingcosts
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
Government policies intended to realize theideology of political democracy through theexpansion of homeownership for all.
The most fundamental function of the market is to
discriminate between creditworthy anduncreditworthy borrowers, but the governmentnullified this function in the name of politicalideology
Distorting market function of allocating housesonly to those who could afford.
The Federal policy designed to promote morehome ownership among households with incomesbelow the median.
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
During 2006, 22% of homespurchased ( .65 million units) werefor investment purposes, with anadditional 4% ( .07 million units)purchased as vacation homes.
A record level of nearly 40% ofhomes purchases were not intendedas primary residences.
Housing prices nearly doubledbetween 2000 and 2006, a vastlydifferent trend from the historicalappreciation at roughly the rate ofinflation
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Korean Economic Development Group 6
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Korean Economic Development Group 6
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Korean Economic Development Group 6
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Korean Economic Development Group 6
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
1. EXCHANGE RATE
2. STOCK EXCHANGE
3. ECONOMIC GROWTH
4. DOMESTIC ECONOMIC INDICATOR
5. EMPLOYMENT
6. CONSUMER PRICE INDEX AND INFLATION
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
improvedimproved policypolicy
limitedlimited exposure toexposure towesternwestern banksbanks
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
Lehman
Brothers
CollapseSubprimeMortgage
Shock
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
LehmanBrothers
Collapse
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Korean Economic Development Group 6
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
2006 20072008 2009
YEAR I II III IV I
GDP 5.2 5.1 2.3 1.2 0.3 -0.1 -4.5 0.2
GNI3
.9 4.8 -0
.6 -0
.6 -0
.4-2
.6 -
1.7-0
.7
Final Consumption Expenditure 5.1 5.1 2.0 1.0 0.1 0.3 -3.2 1.3
Private Consumption 4.7 5.1 1.3 1.1 -0.3 0.1 -4.5 0.2
Government Consumption 6.6 5.4 4.3 0.6 1.5 1.0 1.7 5.0
Gross Fixed Capital Formation 3.4 4.2 -1.9 -2.4 0.2 0.0 -6.7 -0.2
Construction 0.5 5.4 -2.8 -4.2 -0.4 0.7 -3.3 4.4
Facilities 8.2 9.3 -1.0 0.4 1.2 -1.0 -13.9 -9.1
Exports of goods and services 11.4 12.6 6.6 1.8 1.5 -0.1 -8.9 -0.8
Import of goods and services 11.3 11.7 4.4 1.1 1.7 0.3 -14.7 -8.2
(Unit: percent)
(Source: BOK)
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Korean Economic Development Group 6
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
2006 20072008 2009
YEAR I II III IV I
CPI 2.2 2.5 4.7 3.8 4.8 5.5 4.5 3.9
Core Inflation 1.8 2.4 4.2 3.0 3.9 4.8 5.4 4.9
(Unit: percent)
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
The capital account balance posted adeficit of 50.9 billion dollars
September it recorded a deficit of 9.1 billiondollars because of the outflow of foreignersstock investment funds
December, the deficit snowballed to 41.8
billion dollars
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Korean Economic Development Group 6
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
November 2008 IMF-World EconomicOutlook
Korea would grow 2 percent in 2009
Less than three months later
the IMF revised its forecast,
downward to a contraction of GDP by 4percent in 2009,
which would be the worst performanceexpected among Asian economies.
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
DIFFICULTI SI AI TAI I LEVEL OF
GROWTH.
U WARDTREND OF PRICESISEXPECTED
TO DECELERATE
CURRENT A/CISLIKELYTO REGISTER ASURPLUS ASTHE PACE OFTHEDECLINEIN
IMPORTS OUTSTRIPSTHAT OFEXPORTS INACTIVEFINANCIALINTERMEDIATIONINTHEFINANCIALMARKETS
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
Two broad goals:
safeguarding the financial markets
reinstating the financial sector as the patron for the real
economy
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
To stabilize the foreign currency mar et, the government
provided external debt guarantees fordomestic banks and
signed currency swap arrangements with majorcountries.
n the otherhand, to bring backstability to the financial
markets, interest rates were cut and the Bond Market
Stabilization Fund was created to increase liquidity and
help restore the flow of credit to the real sector.
Safeguardingthe financial markets:
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
FOREIGN CURENCYLIQUIDITYPROVISIONFOREIGN CURENCYLIQUIDITYPROVISION
2008-2009 Government and BOK: $55 billion toprovide foreign currency liquidity
10/08 Government: 3-year $100 billion paymentguarantee for foreign currency borrowing by
domestic banks During 11-2/2008, Korea also made currency
swap agreements of $30 billion each with theUS, Japan and China
As an additional measure for stabilizing theforeign exchange market, the government nowgrants to foreign investors an income taxexemption on interest from government bonds
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
INTERESTRATE CUTANDLIQUIDITYPROVISIONINTERESTRATE CUTANDLIQUIDITYPROVISION
To prevent the Lehman Brothers bankruptcyin September 2008 from resulting in a creditcrunch, the BOK reduced the policy rate by
325 base points from 5.25% to 2.0%. To assure liquidity the bank also pumped
23.3 trillion won into the banking systemthrough a Repurchase Agreement (RP) (16.8
trillion won) and treasury bonds (1.7 trillionwon) and the buyback of the MonetaryStabilization Fund (0.7 trillion won)
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
The government also moved swiftly and sufficiently to help banks boosttheir capital and maintain a steady flow of credit to businesses.
1. Bank Recapitalization Fund and helped eightdomestic banks raise their capital.
2. Corporate Restructuring Fund and FinancialStabilization Fund
3. Assistance to the SMEs by expanding debt
guarantees and extending loan maturities
4. Task Force to provide assistance to companiesexperiencing short-term financial difficulty
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
SUPPORTSUPPORT FORFOR HOUSEHOUSE HOLDHOLD LOAN/MORTGAGELOAN/MORTGAGE HOLDERHOLDER::Measures include guaranteeing collateral supplementation
up to 100 million won for the depreciated value of housing,extending the maturity and grace period of mortgageloans up to 10 years, and exempting the early repaymentfees on the transfer from floating to fixed-rate loans
LARGELARGE SCALESCALE STIMULUSSTIMULUS FISCALFISCAL:: Specifically, the government
has earmarked 51.3 trillion won (5.7% of GDP) for a stimuluspackage, which includes investment in infrastructure,provision for the social safety net (16 trillion won), and areduction in corporate and personal income tax rates (35.3trillion won)
JOBJ
OB SHARINGSHARING:: In order to create new jobs and retainemployment the government will spend 60% of its budget inthe first half of 2009 and launch the Green New DealProject, which will invest 50 trillion won for the purpose ofsecuring future economic growth and employment
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
To take steps to encourage a virtuous circle offunds between the financial sector and the realeconomy.
To look for ways to increase the speed andenhance the efficiency of the restructuring process.
To look for ways to reinforce the soundness of thefinancial services industry: utilize the Bank Recapitalization Fund, the Corporate Restructuring
Fund, the Financial Stabilization Fund, and othertools available to help reinforce the soundness ofthe overall financial sector.
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
The economy recorded positive growthin 2009
The current account balance has posteda positive figure
The stock market has managed a
sustained rally The exchange rate has gained vis--vis
major currencies
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KDI SCHOOLof Public Policy & Management
Korean Economic Development Group 6
This optimistic outlook was further bolsteredby the OECD composite leading
indicators(June 8 2009) which showed thatamong its members the sharpest upturn
during the first quarter of 2009 took place inKorea
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