firmly in place has been confirmed through an abundance of historical evidence.
Credit Assessment and Human Evaluation
In US, students will learn that there is no "free lunch." The principles of capitalism forms their educational system.
There is a craze for a better education for their children in Korea. Recently we are seeing a big rush for the so-called "immigration for education." Do we really have a right idea about what we want to educate and how?
A few years ago, I was staying at my relative's house in the suburb of New York city. In one very early morning, I witnessed a scene which was a good sample of American family education. A mother was helping her son to deliver newspapers in such an early and rainy morning. I was told later that they were above middle class people, yet the mother was giving her lesson to her son on how to live as an independent person.
There are so many top grade students from Korea in US. Their parents desire greatly to see their children going to one of the well-known universities of Ivy league. I heard a story about a girl who topped SAT score and applied to Harvard. But her application was rejected. Her angry and furious mother thought immediately of racial discrimination. She went to see the Dean of the College at Harvard University. He kindly explained why they decided carefully not to accept her daughters' application. "Your daughters record on every subject was outstanding. But, during her interview, she said she wanted to be a social worker after she completed her study at Harvard. The interviewer asked her how many times she particiapted in blood donation. Her answer was "Never." That was why your daughters' application was not accepted." That was a good enough reason.
After I heard this story I said as a humor that if she wanted to go to the so-called "top notch" universities in the US, she may want to get a private lesson on rending a service to the community, in a joking manner. I think this episode also shows what is the true meaning of American pragmatism. A word or a knowledge should be based upon action, which is the American way of thinking. A book which I read, they put it rather nicely and cunningly. It said that a notional trait of American is "visible accomplishment and stress on measurement". Whenever we, Koreans, are in a business meeting with Americans, how good we are on talking is not what's important. Because what they really want is that "We want see on the record about what your firm has achieved so far and the visible record". which is very pragmatic way of approaching on credit evaluation.
Benjamin Franklin, one of the founding fathers of US showed us the importance of 'credit' by taking rather direct way with this proverb: "The good paymaster is lord of another man's purse." He also said "If anything might damage your credit or reputation, you must be very cautious no matter how small it is". It is the basic principle of free market society and the spirit of capitalism.
The international confidence of Korean economy was badly damaged in 1997, due
to currency crisis. But I think that Benjamin Franklin already showed us a formula
to get out of the crisis even in 1750's.
"The sound of your hammer at five in the morning, or eight at night, heard by a creditor, makes him easy six months longer."
Nicolai Lenin, a leader of former USSR, instigated by saying that "In the new world, you won't need a bank or a gold and it will only be used to decorate your bathroom". He received a great ovation in the 20th century but because of the closure of market system and financial institutions, USSR ultimately put to its termination. It was due to no efficient rule of credit. Nowadays the importance of credit becomes a global standard for the new century. We must also understand that it is not only for some upper class people but it is for everyone in modern society. We have not taught our youngsters eagerly enough that credit system is a vital importance for people to run a business with credit only. It is an important socio-economic system.
Pragmatism is a truth of 'cash value' inside of a credit system.
Our textbook teaches the importance of credits, but we failed completely to teach our youngsters that 'credit is capital' as in US. Amercan people teach the importance of credit not only in classrooms but also at home and in society. I did not see the radical reformist movement showing "moral of credits" whenever they try to show the "evil of capital".
W. James, a US philosopher insisted "Trust is a cash value". We were quite familiar with the correspondence theory of trust and the eternal value of society. For example, in US, when they first printed their currency, there should be an equal amount of gold reserved in the federal bank, which means 'real value'. But after the Civil War and with the fast growth of economy, there arise a vital need for credit. Later the currency was given its value (cash value) without any gold reserves as long as "it goes well inside of the credit system".
Here is a 10,000 won bill. It is just a piece of paper and while it is circulated, it might get dirty and it is useless for any other purpose. But when you buy any product with that 10,000 won bill from any supermarket or in department stores, it shows its 'cash value'. How that piece of paper has a cash value of 10,000 won? All that matters is the credit.
We now live in a society where credit has a vital importance and if credit becomes not creditworthy, society will not be able to function properly.
A moral hazards during the currency crisis.
What was the real reason for the currency crisis? Because the international society lost confidence in our economy and we lost one half of our GDP in a blink of an eye.
President Kim Dae-Jung and his government realized later that they have just replaced the '97 currency crisis with another big crisis on credit and morality. There are almost 400 thousands of people with credit problem or default. Korean government allowed credit card companies, without appropriate restrictions, to give out cards to almost anyone even on the streets. They found out later how reckless they were to deal with young people without income. Credit card companies are learning the lessons in a hard way on the importance of risk management and ultimately the principle of free market economy.
There are people who owes not just over ten million won but over hundreds of millions won to their credir card companies. They are now becoming a big social and economic problem. Some commit suicide. Some commit crime. All of them reveals unpaid credit card bill as their motives.
Many of us had an illusion of living in a "paradise where you can spend someone else's money" when we watched the rapid growth of credit card industry. You can take money out from anywhere and at anytime you want. Credit card was almost viewed as a magic stick.
Credit cards did some good for the economy. It has been regarded as one way to boost domestic demand. For those with an economic disadvantages, easy credit is an easy getaway. It gives them a second chance, an easy chance to get a loan.
But we must realize that a four million bad borrowers can not be dealt simply with "work-out", which tends to bring about "moral hazards." Writing off their debt without due penalty, thus giving them a second chance without repaying their debt will create seriously undesirable social effects. We begin to hear "There is occasionally a pardon for prisoners. Why is there no pardon for bad borrowers?" If we hear such a comment more often, the social principle of credit will be in jeopardy.
Does one's bad credit really make him or her become a radical reformist?
I wonder whether this bad credit problem is just about 'social security' - welfare policy or about ensuring a certain level of living for underprivileged people. If you were pressed to pay back and you fail to do so, you might even end up having this problem on your shoulder forever. It reminds me of a friend who struggles with his card debts. He was so depressed to say that "In nowdays, I wish we have continuous rain for about three months so the lower and higher part becomes even." It means that everybody goes down into a drain with him like a Titanic.
When you are in a no-way out situation, you might end up praying for Messiah or an Armageddon. I read on a paper that an anonymous benefactor, who donated his lifetime savings, now hide himself because of numerous requests from bad borrowers to help them.
In Germany, 1930's, Germany was bankrupt because of a huge indemnities from the 1st World War. Nazism and Adolf Hitler came to a main political stage and people of Germany thought they might be able to solve this problem once and for all. Germany was a homeland of the 19th century philosopher Kant and Beethoven. But, the majority of Germans in hunger gave their support to Hitler.
We are, now in 21st century, having a great debate about "Conservatism versus Reformism". Frankly speaking, it is very hard to divide 'right' and 'left'. However, mysteriously people now has made simplistic correspondences: 'Reformists = Pro-North Korea' and 'Conservatives = Anti-North Korea'. Strong trade unions are reformists and the entreprenuers are regarded as conservatives.
But if one is in a no-way out situation, the only hope is wishing for egalitarian Messiah to write off your debt. Instead, such people may even end up sympathizing with radical reformist movements. In 1940's, Hayek showed us that 1917 revolution of Russia and 1930's Nazism in Germany are just another typical examples of "The Road to Serfdom."
Clear political commitment about their ideology might benefit the society but merely hoping for writing-off of your debt is too much a wrongly outstretched "reform". Nietzsche declared "God is dead" when he saw an radical populism movement in mass society. He already predicted that in general people already have a common sense of a "Ressentiment (resentment)." This is the power that instigates the populistic movement. If everyone thinks that there is no hope of living with a strong basis of moral and proud citizenship, without explicitly knowing it, the slavery will creep into people's mind.
If even the leaders of the society do not have the mind of 'noblesse oblige', such a "politically motivated" debt pardon will seriously jeopardizes the "rule of law" and the destruction of social trust. If bad borrowers hear a political party saying that they will rule by law when they are in power, people might think that they will be in real trouble. Those people will surely vote againt the party. For someone hoping for a Messiah rather than a constitutional government, governing by law is conservative and paternal pardon is 'progressive'.
But the problem is that Nazis got elected by using the "ressentiment" element in a democratic election. In Argentina, both left and right wings tried to convince people that how compassionate they are to get votes. If a country falls in such a vicious circle, there is no point of dividing left and right. Political amateurism resulted by populism led Argentina to bankruptcy. Without executive ability and effectively controlling the militant trade unions and destructive populism, it only leads to a disaster for a nation. One clear example is the case of so-called ' British Disease'. The cure for 'Korean disease' depends on whether we create true credit without resorting to political fabrication of credit.
We must rebuild and re-balance in our minds a new way of judging people and a new way of shaping an industrial policy. There is a new need for credit evaluation. This is like discouraging discrimination by educational background while encouraging educational achievement. We must show a clear example to our young poeple that a good credit record is a crucial key to social success. But if we do not, we won't be able build a basis for 'society by high level of trust'. I sometimes wonder wehther it is a "money found on the street" when I withdraw money from my credit cards. If I buy goods from a store or pay for a food in a restaurant, I use my credit card but also I try not to forget that it is a loan based on my creditability as collateral.
On a cigarette package, there is an warning about the side effects of smoking. I propose that in every credit card we should put a similar warning such as "It is not for free and your credit is as valuable as your own life."
Il-Chul Shin (Emeritus Professor of Korea University, Philosophy, email@example.com)