Be wary of morphing into a casino economy

If the government adheres to the current system, it can hardly avoid the trap of A casino economy.

Chung Un-chan

The author, a former prime minister and former president of Seoul National University, is the chairman of the Korea Institute for Shared Growth.

A lawmaker’s trading of cryptocurrencies during a committee meeting shocked our society. The legislator’s substandard remarks during a Q&A session in the National Assembly earlier became a laughing stock for the public. But the act of cryptocurrency trading during a legislative session cannot be pardoned no matter what.

The episode not only sounded alarms over the integrity of the legislature, but also made many people worry about the over-the-top financialization of the economy. If a lawmaker engaged in digital coin transaction at any time of the day, what about other individual investors?

The obese financialization of the economy rapidly transforms industrial capitalism into financial capitalism, which has wreaked havoc on the national economy in the past. The ramifications of finance capitalism were already warned against by the legendary economist Cho Soon — a former professor of economics at Seoul National University and former prime minister for economic affairs — in his 2015 paper titled “The principles of economic management for the sustainable development of the capitalist economy.”

First of all, the financial economy breeds casino capitalism, which thrives on risky investments in speculative ventures, prompting asset bubbles from the initial stages. Once a rumor on a windfall spreads fast, it swiftly develops into casino capitalism fueled by its self-fulfilling prophecy about making profits. But an eventual bubble burst can trigger a massive financial crisis.

A case in point is the skyrocketing apartment prices in Korea two to three years ago. As the housing prices soared overnight, people owning an apartment enjoyed the ascension while others without one agonized over how to get it. Those with money rushed to buy it; those with a little money borrowed money from banks to purchase an apartment; and those with little money invested in stocks to take advantage of the stock market crash from the Covid-19 pandemic. And those who wanted faster gains poured their money into cryptocurrencies to help create the casino economy — something akin to drugs that critically damage normal economic activities. Behind the phenomenon is always an overly loose monetary policy. Once the policy direction changes, the bubble bursts.

Second, the financialization of the economy shrivels the real economy as investors turn to casino economy from it. Banks distinguish a company with high productivity and lend money to it to help elevate the efficiency of the real economy. But if the excessive financialization starts to show signs of casino economy, money does not go to the real economy.

The expected rate of return from investments in the real economy differs depending on the strength of companies and the timing of investment. The rate of return hardly exceeds 20 percent. But a 20 percent return is close to an investment failure in a casino economy. What would be the “jackpot” rate of return in the novel economy? No one knows exactly. But investors in cryptocurrencies often post about a 1,000 percent return on social media.

Third, in the financial capitalism, general public have a lack of the will to economize. Here, ABCs of economic principles — such as diligence, saving, and making both ends meet — are simply brushed off. Unless the greed from financial capitalism is not properly controlled, top talent of our society will choose the speculative financial sector based on greed rather than tackling the challenges of a fourth industrial revolution.

Fourth, excessive financialization of the economy accelerates the polarization of income and wealth. Even if the money game not accompanied by productivity improvement can bring huge profits to some players easily, it is not prosperity for all but a feast of their own. That can lead to a world of chaos in which the process of making money is not fair but full of treacherous information and fraud. If political circles fail to screen them out, capitalism degenerates into plutocracy.

How to address the problem? The government must be wary of noninterference in the financial sector. Fintech innovations on digital assets do not directly translate into ensuring a lifting of financial efficiency and fairness. The financial watchdog must protect investors and consumers through a preemptive upgrade of fintech-related regulations and develop the virtuous cycle of the financial economy and real economy so that the market can function efficiently, transparently and equitably. If the government adheres to the current system, it can hardly avoid the trap of a casino economy.

Translation by the Korea JoongAng Daily staff.