"The Stock Market Stabilization Fund Prescription Already Failed 30 Years Ago"

[Economic Crisis, The Way Out] ⑤ John Lee, CEO of Meritz Asset Management

Short-term and artificial measures cannot succeed
Concerns over repeated misunderstandings of government intervention in the stock market

Urgent need to establish a system for long-term investment inflows
Stock investment in retirement pensions as a prime example
Incentives such as tax benefits for long-term investment
Funds concentrated in real estate should also flow in
Investment awareness must be changed through financial education

John Lee, CEO of Meritz Asset Management

The KOSPI index started at 100 on January 4, 1980, and reached 1000 on March 31, 1989. However, after peaking at 1007.8 on April 1, 1989, the KOSPI, which had seemed destined to continue rising, began to fall sharply. The government introduced stimulus measures to prevent the steep decline in the stock market. The most representative of these was the Stock Market Stabilization Fund. It was an effort by securities companies to stabilize the market by contributing a certain amount of money, but it ultimately failed and also earned the stigma of artificial market intervention. After repeated stagnation, the market recorded 450 after three and a half years and then began to rise again. The rising domestic stock market experienced another crash during the 1997 liquidity crisis. The stock index, which had risen to 1017 in the second half of 1995, fell to 280, and the government drafted several policies to prevent the market crash. This time, the government's prescription to stabilize the market was to allow foreign investment limits up to 100%. The purpose was to support stock prices by encouraging foreigners to buy domestic stocks.

Now, 33 years since 1987, not only the domestic stock market but also the global stock markets are experiencing volatility never seen before. Various measures are being proposed to stabilize the domestic market. One of these is the Stock Market Stabilization Fund, which failed in 1989. Short-term and artificial measures can never succeed. Rather, they risk repeating the mistaken perception of government intervention in the stock market.

I would like to propose three of the most effective policies for the sustained growth of the domestic stock market.

First, a system should be established to ensure a steady inflow of funds for long-term investment, not short-term capital, into the stock market. The most representative example is the retirement pension system. The U.S. 401(K) retirement pension system is a good example. Since the introduction of 401(K) in 1980, the U.S. stock market has grown continuously. Unfortunately, Korea's retirement pension system is flawed. Due to this flawed system, hundreds of trillions of won are not being invested in the stock market. Korea's retirement pension fund reached 218 trillion won (as of the end of 2019) and is growing significantly every year, yet most of the funds are invested in principal-guaranteed insurance products or bank deposits. The proportion of retirement pension funds invested in stocks is regrettably among the lowest in the world.

Second, funds concentrated solely in real estate should flow into the stock market to increase capital productivity. It is very dangerous that 80% of domestic household assets are concentrated in real estate. We must never repeat Japan's failure. It is important to remember that Japan's blind faith in real estate and the mistaken perception that stock investment is unearned income have caused economic decline over the past 30 years.

Above all, policies to steadily channel assets concentrated in real estate into the stock market are urgently needed. A shift in perception is necessary, so that owning stocks is seen as more advantageous than owning real estate. In fact, over a long period, stocks have increased in value much more than real estate, a fact not well known by the general public. Like in foreign countries, education about stocks should start early and be taught in schools. The most effective method is to provide tax benefits to those who invest long-term. For example, by differentiating tax rates between those who hold stocks for one year and those who hold for five years, long-term investment can be naturally encouraged.

Third, financial education is essential. Through financial education, people should naturally accept stock investment and recognize that investing in stocks is the most effective way to prepare for retirement. Continuous education is needed to change Korea's stock investment culture, which treats stock trading as a short-term activity akin to gambling in a casino.

In particular, the 30 trillion won spent annually on private education should be redirected as an investment in our children's economic independence through the stock market. One of the biggest reasons Japan has not escaped economic stagnation is the financial illiteracy of its people. The reason Korea's elderly poverty rate approaches 50% and the wealth gap is worsening is also due to financial illiteracy.

If the three policies listed above are harmonized, the domestic stock market will grow steadily over a long period, and the retirement lives of many Koreans will also brighten.

This content was produced with the assistance of AI translation services.