Timetable for rate hike needed
“The buck stops with me,” U.S. President Harry Truman used to say to describe the heavy sense of responsibility as a leader. Federal Reserve Chair Janet Yellen said the same at the news conference after the first Federal Open Market Committee meeting as chair in March 2014. She finally put an end to the zero interest rate era and raised the rate.The rate hike did not happen suddenly. It was forewarned and prepared. Former Fed Chairman Ben Bernanke began tapering in December 2013 and ended quantitative easing in October 2014. Naturally, the market paid attention to the interest rate hike. Yellen declared that the zero interest rate policy would be maintained until she was sure of economic recovery. It took a year and two months for the rate to be raised.
The global financial market calmly accepted the interest rate hike, thanks to the constant communication between the Fed and the market. It was an event with advance notice, and the market could predict the timing based on economic indicators.
The zero interest rate policy came to an end seven years after it was adopted as one of the emergency measures in response to the 2008 global financial crisis.
In the seven years, Korean economy has added debt. As of the end of 2008, household debt was 688 trillion won ($586 billion). By the end of 2012, it approached 1 quadrillion won. There were serious concerns for the Korean economy. Now, the household debt has increased to 1.2 quadrillion won, and Korean society is squashed under the heavy burden.
The 1997 foreign currency crisis taught Korea a clear lesson. Debt is not to be taken lightly. Banks were in jeopardy and ruthlessly raised the interest rate. The banks lend umbrellas on sunny days and demand them back on rainy days. By working hard to reduce debt, the Korean economy could bounce back in the early 2000s.
But the economy is mired in debt again.
The government failed to control household debt, and the media failed in the role of watchman. The measures for household debt have been inconsistent, and it is cowardly to blame individual households for increasing debt. The interest rate cuts fueled the increase of debt.
A former finance minister who recently visited New York was sure that the interest rate would not be raised because of the 1.2 quadrillion won in household debt. But he did not have an alternative.
Raising the interest rate is unavoidable. The interest rate is at historic low today. If the United States and other countries raise their rates, it is only a matter of time for Korea to follow.
When interest rates are raised, average citizens and small and medium-sized businesses suffer immediately. They are already at their limits and cannot afford higher interest.
The Bank of Korea, or anyone in the government in charge of fiscal policy, needs to clarify the timeline for raising the interest rate. They should not repeat empty rhetoric like, “The impact of the interest rate in the United States is limited.” They need to at least allow people time to plan to manage their debt.
The author is the New York correspondent for the JoongAng Ilbo. JoongAng Ilbo, Dec. 22, Page 34
by LEE SANG-RYEOL
with the Korea JoongAng Daily
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