Welcome back. Let us take a look at the 2008 global financial crisis and the Korean economy. After Korea experienced the 1997 Asia financial crisis, we went through many painful reform, and we recovered our current account surplus. And we tried to manage good macroeconomic situation. However, in 2008, September, global financial crisis began with the collapse of the in the USA. Let's see how it actually began. As everybody knows, what actually triggered the crisis was the subprime loan crisis. Many USA household below the subprime credit, they could borrow loan at relatively easy Interest rate. And a lot of people they actually bought the loan at low interest rate and they put this money into the housing market. So there was a big boom in the housing market and eventually it created bubble and it went burst. Look at the household debt of USA, and similarly, UK. These household, they could borrow more and more money from the bank at low interest rate and so they put the money into real estate until it collapsed in late 2007 and early 2008. Well, this is a very similar story to the other crisis experience. However, we have a couple of other factors this time. This time, we had financial derivatives. In the USA financial market, especially at the Wall Street, They created new financial products, such as financial derivatives. Based on the mortgage loan, they created MBS, mortgage-backed security. And, based on the MBS, they created CDO. And then, they created CDS. And these financial derivatives were interrelated with each other. So when one financial product turned into trouble then via chain reaction everything else turned into trouble too. And that's why this financial crisis was different and more serious than the previous crisis. And behind all these financial derivatives and financial transactions there was some structure problems. Too many people in the financial sector were pressuring short term profits. So they were very much eager to make new financial product and buy and sell these financial product to enjoy short-term profit. When you combine all these factors, we had crisis in 2008. And this time, Korea was not an exception. Take a look at this exchange rate between Korea won and USA dollar. It stays stable until 2008 September, but then, when the crisis began, look at how fast the exchange rate increased. It happened because a lot of foreign investors who invested their money into Korean stock market, and Korean bond market, and Korean banking sector, they withdrew the money from Korea. Now if you estimate the total amount of character outflow from September 2008 and only 2009, it is as big as $60 billion. They sold Korean stock and bond and converted it into USA dollar and escaped Korea. And many Korean commercial bank they borrowed money from foreign bank, such as Japanese Bank and USA Bank, in the short term. And these foreign bank, they refused to renew the loan, and they got their money back and escaped Korea. So when $60 billion dollars escaped from Korea, naturally exchange rate skyrocketed. It looks just like exchange rate fluctuation of 1997 Asian financial crisis. However, this time Korea was different because even though we lost $60 billion in just several months, we actually had more than enough for an exchange reserve this time. The total foreign exchange reserve before the crisis, was $260 billion. So even after loss of $60 billion, Bank of Korea had $200 billion, which is very comfortable level to defend our exchange rate, and it happened. After a couple months, it got stabilized. And Korea also experienced V-shaped recovery, just like we did in 1997. We initially suffered from negative growth for a couple of quarters, but rapidly we recovered from the initial shock and we gained positive growth. When you compare it to the other countries, Korea is actually one of the most successfully recovered countries among the OECD. So how come Korea could recover from the initial shock so fast? I think there are several factors, but probably one of the most important factor would be the contribution of export. Once again, export saved Korea from the crisis. Especially export to the emerging markets. That will be a big difference this time. Now a lot of advanced countries, including USA, Japan, and Europe, they were in trouble after 2008 crisis. So we do not increase our export to these advanced countries. However, emerging market, especially China, recovered fast out of this crisis so our export to this emerging market increase rapidly. This is monthly export volume from Korea to China. As you can see, after the initial shock, we recovered fast and actually, in just one year, our monthly volume actually exceeded the pre-crisis level. So let me compare the similarities and differences between 1997 crisis and 2008 crisis. Similarities. This time the short term debt was a problem too. Just like the short term debt was the problem in 1997. Once again, Korean financial sector borrowed too much short term loans from foreign commercial banks, but it has a V shaped recovery after the initial shock we actually recovered fast. And the best contributor to the recovery was just like 1997, net export and also government spending. Thanks to good fiscal condition of Korean government. We could actually spend huge amount of money to bail out our economy. This time, National Assembly of Korea helped too. Right after the initial shock of the crisis, National Assembly approved more than 3% of GDP fiscal stimulus package and this fiscal stimulus package helped Korea to recover fast. Monetary policy was eased right after the crisis. But this is actually questionable because in the case of 1997, in the beginning, monetary policy was tightened, and then eased. But in the case of 2008, monetary policy was loosened up from the very beginning. As I just mentioned, fiscal policy was actively used by the Korean government to bail out the Korean economy. However, we do have some differences between 1997 and 2008. First, the cause. In many senses, the cause of the 1997 crisis was external and domestic. However in 2008, it was external cause. And financial derivative, there was a big difference. Just like many other OECD countries, Korean financial sector, they also lost huge amount of money in financial derivatives market. However, more than anything else, this time we had abundant amount of foreign exchange reserve. $260 billion before the crisis. And even after we lose $60 billion, we still had $200 billion. And this time for the corporate sector and the financial sector was a lot more stronger and more sound than 1997. And that's why they could go through this difficult time and eventually recover without causing any major bankruptcy in our economy. That's the evolution of the crisis in 2008 and its effect on Korea. Now in the next lecture we will takea look at some aftermaths of the crisis.