[VIEWPOINT]Interest rates are the real problem

The remarks made by high-ranking officials of this administration often are provocative and too harsh.
One such example is the article Kim Byung-joon, the policy chief of the Blue House, wrote on an Internet site, the Blue House Briefing, under the title, “At the frontline of blocking the source of unearned income [from speculative real estate investments], there is no retreat.”
If there is no retreat, it means decision makers of this government will continue to march on.
I wonder against whom they intend to march in their military boots.
However strongly one may hate those who own homes in the Gangnam area, an affluent residential area south of the Han River in Seoul, it is ill-mannered to say “there is no retreat.”
That threatens the citizens who live there and pay taxes levied by the government.
It really makes us feel uncomfortable to see the government launch a concentrated attack on the so-called real estate bubble, because it makes us feel a sort of paranoia and obsession.
I myself belong to those who think there are problems in the price of homes in three districts in the Gangnam area.
Though there can’t be an exact answer to the price of homes, we can’t deny there are problems in the price of homes in Gangnam.
For example, how many years does it take for a citizen with an average income to buy a house? Compared to the mid- and long-term rate of price increases of other commodities, how big is the gap? In case a house is rented out, how much investment earning is expected?
Even with just a couple of questions, we can agree without much difficulty that there are a lot of problems in the price of housing.
Therefore, even if the government does not intervene in the real estate market, it is highly likely the price of homes will go down. Thus it is difficult for me to understand why government officials are making such a fuss.
Moreover, the government says publicly that the effect of government measures, including the realization of the tax base of the real estate tax to the market price of homes, will soon appear.
If the government is full of such confidence, it should wait and see.
People wonder, since when has the government become so kind that it worries about the real estate market ― saying it is time to worry that people will lose big money if they buy a house now because it will be at the highest price.
What is even more difficult to understand is why the government still does not pay attention to interest rates.
The main culprit that made the prices of homes skyrocket in the past two years was the government’s failure to change its interest-rate policy on time.
In retrospect, before the launching of the present administration, the target call rate was 4.25 percent. Right after the Roh administration came into power, however, the target call rate was lowered in 2003 and again in 2004, making it fall to 3.25 percent on Nov. 11, 2004.
It is clear what kind of signal the government’s interest-rate policy has given to the market.
The most important function of the Bank of Korea is the establishment and the execution of monetary and credit policy. The central bank describes it as the following: “Convey the intention of the monetary policy to the financial market with an appropriate signal in advance and listen to the expectations and reaction of the market participants.”
How did market participants interpret the signal of lowering the target call rate four times within two years? They all know the Ministry of Finance and Economy is behind the Monetary Policy Committee.
How did they read the intention of the government policy? Under the situation where the interest rate of a fixed deposit is below zero after the income tax on interest is deducted and the lending rates were lowered, what thoughts did the investors have?
If the government intended to promote investment by lowering interest rates, it made a big misjudgment.
Even at the end of 2004, the cash-reserve ratio of manufacturing companies listed on the stock market has been at more than 500 percent.
It means that it was not because they had no money or could not bear the financial expenses so they didn’t invest.
So, where should the money flow into? Predictably real-estate related loans increased rapidly and, as a result, the prices of homes skyrocketed.
It was only after October last year that the monetary authority started to raise interest rates. But the money had already flown to the market and the interest rate hike was too meager to be read as a meaningful signal.
Instead, because the money was already released into the market, we were forced to keep lower interest rates despite an international trend of interest rate hikes.
The aftermath of a misguided policy and poor timing is very damaging.
Although it is belated, the monetary authority must send an appropriate signal after “listening to the expectations and reaction of the market participants.”
While emphasizing worries over a bubble burst, if the government does not make use of interest-rate policies that will affect the demand-side most, people will think it rather strange.

* The writer is the chief of the editorial page of the JoongAng Ilbo.

by Park Tae-wook