[FOUNTAIN]Ridley's law and home loans

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[FOUNTAIN]Ridley's law and home loans

A British official in Margaret Thatcher's cabinet, Nicholas Ridley, once commented that there is a close historical relationship between interest rates and public support for a government. The higher interest rates are, he said, the less popular the government is. Mr. Ridley was one of Mrs. Thatcher's closest allies, and held the transportation, environment and trade and industry portfolios at various times. A man of action, Mr. Ridley was usually one of the first ministers to turn the Iron Lady's ideas into policies.

Mr. Ridley's comment was based mostly on modern British history, when the Conservatives and Labor frequently moved in and out of power. In research done in the 1980s, it was found that if the Bank of England raised the country's interest rates by 1 percent, support for the party then in office fell by 3 percentage points. The political economist and Oxford professor Niall Ferguson dubbed this relation between interest rates and political support "Ridley's Law."

But Mr. Ridley's law failed to operate in a situation in which he was involved. It happened when he played a leading role in the push for a poll tax, which triggered one of the biggest political controversies in modern British history. The poll tax was regressive, and applied to every British adult of every income level. Mr. Ridley, then the environment minister, believed that the tax was the best way to bring more money into the Queen's coffers and pushed it through over strong opposition in 1990. It was a huge political victory for the Thatcher administration, but it also was one of the main reasons that the Conservatives lost power seven years later.

The Bank of England's benchmark interest rate had fallen from 10.5 percent in 1992 to 6 percent in 1997, but that could not save the Conservatives from a crushing defeat in the 1997 elections.

Koreans are debating interest rates just before the presidential election. Government pressure has forced banks to raise their household loan rates, and consumers are complaining because deposit interest rates are still low; the rise in loan rates is benefiting no one but the banks.

Certainly household borrowing is a problem, but trying to fix the problem by raising interest rates without addressing the underlying causes for the increased borrowing will not work.

Is the administration not worried about Ridley's Law? Do they think that only a poll tax could hurt them?

The writer is the head of Forbes Korea.

by Sohn Byoung-soo

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