Is it really the interest rates’ fault?

Yi Jung-jae
The author is a columnist of the JoongAng Ilbo.

Anyone coming into a senior position is tempted to dump the blame for wrongdoings or losses on their predecessor. That way, newcomers can hide their shortcomings and make things look better. During the Lee Myung-bak administration (2008-2013), when the global financial crisis spilled over, so-called “big bath” practices were popular in the financial sector. New CEOs dug up the dirt and losses of the past to reflect them in the company’s income statement to accentuate improved earnings in the following year. But the effect lasts two to three years at best. The company’s situation bares itself sooner or later. The practice has only ended up hurting the Korean financial sector.

The big-bath practice is more rampant in politics. President Kim Dae-jung came into office when the country had to seek an international bailout to avoid a default following the Asian currency crisis. He candidly told the people that Korea’s national coffers are empty. Youngsters and the elderly lined up to donate their gold rings to help Korea combat the national crisis. The blame was placed on the past conservative governments. As a result, Kim was able to push ahead with reforms in the chaebol and labor sectors.

But he was only half honest. Korea’s public finance was among the healthiest in Asia at the time. The country’s foreign exchange reserves were refilled in a year thanks to the government’s fiscal health. Kim’s big bath worked because he was clever enough to take advantage of the blame game.

The Moon Jae-in administration is also from the liberal line. Every wrong is dumped on past conservative governments, who were in power for nearly a decade. After a year-long battle that caused housing prices to soar produced little results, they are now finding fault with interest rates. Prime Minister Lee Nak-yon first brought it up. Then Minister of Land, Infrastructure and Transport Kim Hyun-mee came forward to blame the past government’s encouragement that families buy apartments with cheap interest rates and excess liquidity due to the protracted low-rate environment as the biggest reason for the overheated housing market. Their blame game is neither sophisticated nor logical.

It is true that there is excess liquidity. It is also partly true that some money flowed into the housing market due to a lack of investment opportunities. But the government so far has not done anything to correct the imbalance over the last year. It has not presented supply measures to meet the demand for housing or taken financial and economic actions. Over the last year and a half, all it has done is hunt down speculators. Fatigued by the clampdown, it now finds fault with excess liquidity and cheap rates.

Raising interest rates will not necessarily bring down housing prices. It will only make lives harder for ordinary families, as household debt totals 1,500 trillion won ($1.3 trillion). The fluid money won’t disappear just because interest rates go up.

As money makes money, it chases profit. Excess traffic and concentration of money can build a clot and cause a hemorrhage. It is the policymakers’ role to ensure smooth traffic in investments so that imbalance and over-concentration does not take place.

Authorities should have stimulated the capital market so that they could have drawn some of the fluid money and encouraged companies to invest. But they only hurt the stock market by taxing rich individuals and companies. When cryptocurrency drew heat, authorities moved fast to regulate it by likening it to illicit gambling. This is why excess money gushed into the real estate market — there was nowhere else for it to go.

If the government was that unhappy about low interest rates, the president should have replaced the Bank of Korea (BOK) chief. BOK Gov. Lee Ju-yeol pushed rates to a record-low level under the last administration. Yet he was given a second term by the Moon administration.
Whether the opinion has been coordinated within the government is also questionable. In late August, a senior Blue House official said the rate policy must consider domestic conditions instead of following the rate hikes in the United States. The comment sent the government bond yields tumbling down. An official at the Finance Ministry shook his head over the rate hike talks, as economic conditions are worsening and a deepening job crisis.

The central bank finds itself in a sticky spot. If it raises the interest rate in next week’s monetary policy, it would more or less be admitting that cheap rates fueled housing prices, as some in the ruling party claim. If it stays put, it will invite more nagging and criticism from the authorities, which are obsessed with calming the overheated real estate market.

Jan-Werner Muller, a professor of politics at Princeton University, said populist leaders use polarization as a technique. They blame elites, saboteurs, media, foreign meddlers and so on for whatever problems that emerge, which prepares the people for a showdown with the alleged enemies of the people. The liberal Moon administration is too self-righteous.

JoongAng Ilbo, Oct. 11, Page 30