[VIEWPOINT]Doing nothing can be the biggest mistakeA large oil painting hangs on the wall behind the chair of the governor of the Bank of Korea, Lee Seong-tae, at the Monetary Policy Committee. The painting, which depicts the first meeting of the Monetary Policy Committee in June 1950, symbolizes the pride and sense of responsibility of the committee that “even in the chaos during the Korean War, we maintained the order of the financial market.” In that sense, the painting matches well with Mr. Lee’s resolute remark, “The current interest rate is at a level designed to boost the economy.”
Mr. Lee reminds me of the former governor of the Bank of Japan, Yasushi Mieno (1989-1994). They both climbed the ladder in their central banks for more than 40 years before taking control of their nation’s financial policies.
Mr. Lee, who memorizes almost all important economic indices, has the nickname “Mr. Scholarship Quiz.” Mr. Mieno earned the reputation that “On finance, it is Mr. Mieno.” Both of them have the firm resolve to say “no” to anyone who opposes their beliefs.
Toward the end of 1989, when Mr. Mieno took command of Japan’s central bank, the Japanese economy recorded a growth rate higher than forecast, despite the strong yen in the money market and the stabilization of commodity prices.
In addition, the consumer price index was around 2 percent and the manufacturer price index was below zero. It was similar to the present state of the Korean economy, which is growing at a rate of 4 percent while the consumer price index stays at a 2-percent level. There was no reason to gamble by raising the interest rates.
At that time, the minister of finance was Kiichi Miyazawa, who was aiming to be the next prime minister. He put out the political slogan that he wanted to “double people’s assets,” and pressured the central bank to ease financing restrictions whenever it found a chance.
It reminds us of the Ministry of Finance and Economy, which pressured the Bank of Korea not to increase the interest rates whenever there was a sign of a possible increase.
Recently the situation has been aggravated to the point where even the chief policymaker of the Uri Party pressures the central bank, saying, “This is a time when we need to prime the pump.”
But Mr. Mieno’s resolve was that the “bubble should be removed.”
Despite pressures from all sides, he raised interest rates. He raised the rates from 2.5 percent to 6 percent in about a year. Within exactly two years, the bubble in the price of stocks and real estate in Japan burst completely. People who suffered from relative deprivation got excited, wildly calling him “a Robin Hood of our times.”
Since then, the prices of real estate in Japan have not climbed once, for 12 years.
In Japan nowadays, there is an active movement to re-evaluate Mr. Mieno’s achievements.
He was once attacked, because “his excessively radical measures invited disaster” for some time. That criticism faded away when the Japanese economy reached full power again.
Most of the people now say, “If it were not for his determination, Japan may have lost not 10 years, but 20 years.” Some people even say enthusiastically, “He is qualified enough to be named as one of the four most prominent central bank governors of the world.”
Of course, it is questionable whether Mr. Mieno can be compared with the renowned leaders of the financial world.
Economists name former chairmen of the U.S. Federal Reserve Paul Volcker and Alan Greenspan and former president of the German Bundesbank Karl Otto Pohl as such leaders. They took command of their central banks for 12 to 20 years without being interrupted by changes of power. They protected the economy in difficult situations and endured criticism from politicians. Former Bundesbank President Pohl retorted to former chancellors of Germany, Helmut Schmidt and Helmut Kohl, when they tried to intervene in financial affairs, that “The German mark is under my jurisdiction, so you’d better concentrate on politics.”
Could this be the reason why even George Soros, an international financier who manages a hedge fund and once threatened the stability of the British pound, did not dare manipulate the German mark? Mr. Soros admitted that the German financial system was strong by saying, “The German Budesbank has its own way of management.”
There has been no time like now when the interest rate policy didn’t have an effect on the market. The market reacts little to small-scale changes.
However, it is not easy for us to change the rates on a bigger scale and rapidly aim to incite a psychology of expectation of the people as in the United States. In the meantime, we have seen many central bank governors who made unnecessary comments on other countries’ interest rate policies, while failing to perform their own jobs properly.
We are fed up with their belated excuses and word plays. I am curious to know what thoughts Governor Lee has nowadays in front of the painting that depicts the steely resolution of the central bank.
This is not a time to agonize and hesitate repeatedly. Former Federal Reserve Chairman Volcker emphasized the necessity of taking resolute action by saying, “In order to avoid making a mistake, doing nothing is the best policy.
But in retrospect, there could never be a bigger mistake than that.”
* The writer is an editorial writer of the JoongAng Ilbo.
by Lee Chul-ho