[Viewpoint] Learning from the U.S. health care reform debateThe effort to cope with the international financial crisis through international cooperation over the past year is showing good results so far. The financial market has grown stable and the international economy is showing signs of recovery. This historic experiment in economic policy is a success as of now.
Developments in economics over the past century are largely to thank for this accomplishment. And that great economists like Ben Bernanke and Mervyn King were at the helm of the central banks in the United States and Britain was also a factor that facilitated the immediate application of our accumulated knowledge of economics to actual policy.
To put it simply, things went well. However, the situation we are going to face now is not an easy one, either. First of all, there’s the difficulty of establishing an exit strategy. The financial and currency policies that saved the international economy from depression are extremely expensive to maintain, making setting future economic policy more difficult and raising uncertainty about the future. The response to the crisis - to flood the market with liquidity - was unprecedented and will have unforeseen consequences.
The market in any country welcomes lower interest and increased government spending, but pressures will arise when reductions in expenditures are made. Not only do typical households experience financial difficulties when the interest rate burden is raised, but corporations and financial companies also have a hard time raising funds.
This tends to lead to aggressive lobbying, putting pressure on the central bank from the business world, inside the government and public opinion. By the time these political pressures die down it will already be too late.
In the current situation, we cannot and should not look forward to a war to stimulate demand, as was the case during the Great Depression. But without some major event, policy authorities will not easily be able to reduce the scale of financial expenditures or break away from the role of stimulating demand.
That means the expansion of the financial deficit and an expansive currency policy will continue for some time, and excessive international liquidity will be aggravated. This may lead to deepening social instability across the world in the future by provoking a rise in asset prices and aggravating gaps in wealth and income. We must emphasize the need for preemptive measures.
Since last fall, Korea has executed unprecedented expansive financial and currency policies. These expansive policies, together with a weakened currency against the dollar, have contributed to the quick recovery of the Korean economy. However, Korea is now faced with the task of executing an exit strategy preemptively, before other countries.
The government says it is too early to establish an exit strategy and emphasizes the need for international cooperation. I understand their point of view completely. The international economy has just stabilized owing to the effects of expansive fiscal and financial policies, but it still conceals many uncertainties.
Reflecting on the history of the Great Depression and of Japan in the 1990s, we cannot help but consider the danger of pursuing an exit strategy hastily. In addition, we cannot help but emphasize the need for international cooperation, as Korea will be the G-20 chair country next year.
However, we also need to consider what the United States and Europe would do, if they were in the same financial situation as we are now. The composite leading economic indicator of Korea has already been on the rise for the past seven months. Mortgage loans for housing have grown much more quickly over the past eight consecutive months, and there is an overflow of liquidity.
Whereas other countries still have stagnant real estate markets or prices that are much lower than before the crisis, Korea, which has maintained a relatively stable market, is showing rapid price increases. If the trend toward real estate price hikes continues as it does now, it will not only worsen the distribution of wealth, but also stimulate inflation by affecting consumption.
There has been a lot of debate among economists on the matter of coping with real estate prices using interest rates, because this has an effect not only on real estate, but also on the real economy. However, as long as abnormally low interest rates are maintained, it is difficult to stabilize the real estate market no matter what other solution may be introduced.
An expansive currency policy was required, but considering the situation in the Korean economy, which did not need to worry about deflation unlike other countries, the Bank of Korea may have lowered interest too drastically at the beginning of the year. The currency expansive policy could be maintained even if the basic interest rate was raised a little.
Yet in a situation where families and small and medium-sized companies have a lot of debt, raising interest rates is a burden for policy authorities.
The problem is that even if we take our time the circumstances will not improve. A large part of macroeconomic policy is established by policy authorities’ making appropriate choices, considering both the current benefits and future public interest. It appears that the current high spending will have to continue for the time being, but currency policy is now nearing a critical moment, and action should be considered.
*Korea may be proud of its quick recovery, but problems remain - especially in real estate.
Translation by the JoongAng Daily staff.
by Cho Yoon-je