[VIEWPOINT]Economic worries? Maybe laterWhat goes around these days reminds me of what is often attributed to Madame Pompadour, a mistress of the French King Louis XV. "After me, the deluge," which means she could care less if a great flood came after she was gone. As a great favor to the king, Madame Pompadour, who monopolized national affairs and lived a life extravagant enough to drain the national treasury, made that statement when some expressed worries to her. Twenty-five years after she died, without experiencing any difficulties in life, the French Revolution, as she had predicted, broke out and the royal families met a tragic end.
The after-me-the-deluge syndrome has been seen not only by politicians but also by business leaders in this country. The economic ministries, banks, credit card companies and households all seem to be suffering from this syndrome. National debt mounted after the financial crisis, but the government has no regard for the problem, saying it is not an imminent issue. The government is delaying a formulation of fundamental solutions for the national pension fund and for the medical insurance system, which are forecast to become bankrupt in the near future.
For the financial sector, the government was too eager to revive the economy by adding enormous amounts of liquidity with its low interest rate policy. Keeping in step, banks and credit card firms expanded household loans. Household debt doubled in four years and credit card loans increased at an even faster pace: tripling in two years. Increases in household cash expanded consumption, which in turn led to a booming real estate investment and construction business, followed by economic recovery. This is behind Korea's annual economic growth of more than 6 percent, unlike other countries suffering low economic growth. However, negative side effects have recently appeared. The international balance of payments for Korea worsened and real estate prices in some areas surged.
With those circumstances, the government should have modified its policies, restrained overflow of capital, raised interest rates and taken microeconomic measures to prevent side effects.
Conversely, the government kept interest rates low and took emergency steps, but only secondarily, such as conducting tax investigations, raising property taxes and toughening apartment purchase rules. The government insisted on keeping interest rates intact, saying, "Raising interest rates would not resolve heated real estate speculation," or "Raising interest to stop real estate speculation might ruin the economy."
Although these arguments may sound reasonable when first heard, there are flaws in their logic. The belief that hiking interest rates cannot stem real estate speculation is merely a rhetorical paradox to gloss over the real issue. There is no question that overheated speculation in the real estate market is mainly attributed to low interest rates and expanded household loans. The Bank of Korea estimated that 40 trillion won ($33 billion) out of 67 trillion won in total household loans during the last eight months flowed into the real estate market.
Despite worries about potential side effects, including an interest rate hike and a tightening of the money market, raising interest rates should be one of the essential plans to curtail the real estate bubble. Furthermore, the government considered selective measures, rather than raising interest rates, to stem real estate speculation in order to prevent potential damages to the economy. But the government attempt was already considered ineffective. Real estate speculation continues to spread to other areas from its origin.
Thus, overheated real estate speculation can no longer be underestimated and the government should keep in mind that the current policy can bring about disaster. There is just too much liquidity everywhere. Even the governor of the Bank of Korea lamented, "With the overflow of capital, no one knows what is going to happen." In this situation, what is going to occur to our economy next year or later if the government insists on sticking to current policy?
Are we going to see a healthy economy with real estate problems resolved, or will the entire economy be in jeopardy? It is just frustrating.
The writer is the director of the JoongAng Ilbo Economic Research Institute.
by Ro Sung-tae