Economy calls for cautionFinance Minister Yoon Jeung-hyun made a sensitive comment at a sensitive time. A couple days ago, he said a financial crisis had arisen because excess liquidity is building due to low interest rates, a problem policy makers treat with more low interest rates. Market participants tried to parse the words of the finance minister, who has so far defended a loose monetary policy to prop up the economy, but is now warning of the dangers of continuing such a policy. Some jumped to the conclusion that a departure from the stimulus policy or a rate hike by the central bank was imminent. But government officials now say, “His comment should not be stretched.” We agree that the finance minister did not hint at a rate hike, but was instead just expressing the general opinion about the ill effects of delayed monetary tightening on a recovering economy.
His comment also reflects the economic dilemma of the government, or more specifically, the central bank. Liquidity is available in excess. In fact, the monetary supply is so high it’s sent the one-year bank deposit rate to historic lows in the 2 percent range. Banks are said to be turning away depositors coming with a lot of cash. Banks cannot find investments to reap returns these days either. Loans to small and medium-sized companies, retailers and households are risky. Still, banks cannot offer to lend more to large companies who are already sitting on extra cash. Money is overflowing, yet it has no place to go. An oversupply of currency can turn money hot and lead to inflation as well as explosive asset bubbles. These are the pitfalls of low interest rates. Inflation remains contained, but pressure is building from the rising international prices of oil and raw materials.
The central bank can’t easily shift to tightening policy through rate hikes or repurchases. The economic conditions remain too fragile to make an exit. If interest rates rise, the slumping real estate market may further freeze. Household debt, which has reached levels past our ability to repay, could turn bad. On a moment’s notice, even banks may turn insolvent, splashing cold water on the recovering economy.
When monetary policy is trapped, it is best to seek a solution from industry. Encouraging companies to spend more is the best way. Money must be channeled into healthy industrial fields. The government must seek out new growth industries, map out support plans and ease regulations to incubate such businesses.
Authorities must ready contingency plans against capital disproportion. We should not forget the extreme asset bubble of five years ago. Bubbles grew in real estate and the stock market when authorities dithered in shifting to monetary tightening despite signs of economic recovery. We can’t afford to make that mistake again.