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[VIEWPOINT]Do the sensible thing: raise rates

Published: 08 Nov. 2006, 21:24

President George W. Bush of the United States has never said, “I will sort out the real estate price increases, no matter what.” I have never heard that the U.S. government has increased taxes on real estate drastically or built new satellite cities at random. I only remember that Ben Bernanke, chairman of the board of governors of the Federal Reserve, took a resolute measure. The prices in the U.S. real estate market took a noticeable downturn in September of this year. The Federal Reserve Board’s strong will to raise interest rates has cooled down the overheated real estate market, neat and tidy. It is an accepted formula that the instability of asset prices should be addressed by financial policies.
Korea’s government, through Government Briefing, a news portal operated by the Government Information Agency, proposed on Monday “to raise interest rates or reduce the circulation of currency to a level that will make it burdensome for people to buy apartments with borrowed money.” It is quite likely that the government will be criticized for violating the independence of the central bank. But I think it courageous that the government is sending a relief signal, even belatedly. In terms of formality, the Government Briefing described it as a “proposal,” but in practice it was “a declaration of surrender,” in which the government admitted its controversial real estate policy had failed.
In the market, two groundless convictions are now spreading.
The government will not change its interest rate policy before next year’s presidential election. The governing camp will never give up its game of trying to keep political power.
The expectation is that taxes on real estate, including the capital gains tax, will definitely be relieved by the winner of next year’s presidential election.
I wonder why the government has so far pretended as if it did not care about interest rates. Even now, the government criticizes people by saying, “People buy apartments, because they don’t know the reality.”
However, the real estate market sees the problem clearly. The supply of apartment houses in the market will not meet the demand two years from now.
During former President Roh Tae-woo’s government, the price of housing units skyrocketed for two years from the time the plan to build new cities was announced until the day people started to move into the new units in the new town. This is why people tell the government, “Mind your own business.”
The Monetary Policy Committee meeting today will be an important watershed. The monetary committee should show a firm determination. As we saw in the U.S. case, there is no better prescription to an overheated real estate market than to increase interest rates. What matters is the side effects. Inside the Bank of Korea, there are people who take a more prudent position, saying, “Is it necessary to manipulate a financial policy that affects the overall economy?” However, isn’t the president himself sending out an SOS signal? He used the expression, “No matter what.” It is urgent, really.
First of all, the government must make its own position clear. According to a calculation model from the Bank of Korea, a 1 percent point interest rate increase will lower economic growth by 0.44 percent. Roughly speaking, there is now a choice between “3 percent growth with a stable real estate market,” and “4 percent growth with an overheated real estate market.”
We cannot stop the real estate price increases if we are not determined to sacrifice a certain amount of economic growth. The opposing argument, “Higher interest rates will increase the repayment burdens when the amount of household loans are already high,” does not make sense. The higher the amount of household loans, the more we have to raise interest rates to prevent problems from worsening.
Now, it is time for the Bank of Korea to speak out. The central bank has raised interest rates five times during the last year, but it failed to receive positive feedback. The Federal Reserve of the United States reacts sensitively to the movement of the average real estate transaction price nowadays. In comparison, the Bank of Korea seems so far to have been paying attention only to rental units, which are included in the consumer price index. Price stability has been attained without much difficulty because of the strong Korean won in the exchange market. Now, the bank has to pay attention to more difficulty economic problems than price stability. And an affirmative evaluation on the job of the Bank of Korea is hundreds of times more important to the independence of the central bank. The Federal Reserve Board could establish a firm independent status by accumulating trust and respect by making correct judgments and courageous decisions. The Korean market craves “the Midas touch” for Korea, like the one held by Alan Greenspan, former chairman of the Federal Reserve Board, who elevated interest rate policies to the level of an art.

*The writer is an editorial writer of the JoongAng Ilbo.

by Lee Chul-ho