The quantitative easing furor

Today, I’d like to address the idea of a Korean version of quantitative easing floated by former finance minister Kang Bong-kyun soon after he accepted the position as co-head of the Election Campaign Committee of the ruling Saenuri Party.

First, we must ask whether the monetary easing actions taken by major central banks around the world, an unconventional means to inflate liquidity and prop up their economies, was a good idea or not. How did it come up in the first place? The deputy chief of the Minjoo Party of Korea’s Economic Committee, Chu Jin-hyung, claimed that the ruling party was riding on the opposition party’s economic platform.
He probably is right. Kang served as finance minister and the senior secretary for economic affairs under liberal President Kim Dae-jung and is a three-term opposition lawmaker. Kang could not have let Kim Chong-in — interim leader of the Minjoo Party, who was the architect of the economic platform for President Park Geun-hye during her presidential campaign — steal the spotlight on economic affairs. The idea of quantitative easing could have been one of his cards to gain attention from the media and voters.

Kang borrowed the unconventional monetary policy concept in which a central bank purchases securities from the market to lower interest rates and increase money supply for financial institutions to promote lending and liquidity so that the Bank of Korea could fund financial institutions’ corporate restructuring. Cho Won-dong — the Saenuri’s economic policy chief and former presidential secretary for economic affairs, who is working on the economic platform of the ruling party with Kang — said they brought up the issue of quantitative easing to raise awareness of the need for corporate restructuring, as it would obviously raise more controversy and attention than calling for special loans from the central bank to fund the clean-up of ailing companies.

They succeeded in starting a firestorm. Quantitative easing instantly became the most talked-about policy issue on the campaign trail. The Saenuri Party, which pledged to announce seven major campaign platforms over seven days, even adjusted the timetable to enjoy the tempest in the teapot.

Whatever their intentions, we must judge whether the idea is right for us. Central banks that resorted to the unorthodox way of injecting unlimited cash into their economies did so when they could no longer push down short-term interest rates as they were already at or approaching zero. It no longer can be called unconventional, as Japan, the United States, the European Union, and China all have employed the monetary tool.

Kang tweaked the concept. In fact, his design hardly meets the policy’s definition and purpose. The Korean base rate is now at 1.5 percent, still far above zero. Kang proposed the central bank purchase bonds issued by the Korea Development Bank rather than government bonds. The central bank had offered special loans to the state bank to help fund corporate bailouts and restructuring during the financial crisis in 1997. Kang suggested the bond-purchase program specifically be used to fund financial institutions’ corporate restructuring and aid households deleverage their debt. Cleaning up bad companies and debt cost a lot of money. Jobs will be lost and many facilities will be closed. There must be enough liquidity ready to prevent any squeeze.

Kang has rocked the house. But does his idea have any feasibility? It won’t be easy.

Both the government and central bank chose to ignore it instead of outright shooting it down. Yoo Il-ho, deputy prime minister for the economy, who initially said the idea was Kang’s personal musing, later took a step back and said a campaign platform should be respected. Lee Ju-yeol, Bank of Korea Governor, tried to avoid talking about it saying it was ”inappropriate” for the central bank to comment on an economic platform of a political party. Later he drew the line by saying Korea’s case is different from other countries.
The Blue House did not make any comment while the opposition criticized the idea for being “illegal.” Other ruling party members kept mum. Kang will likely leave the party once the election is over, and it serves them well if it attracts some votes.

The so-called quantitative easing idea is likely to be headed for the trashcan once the election is over. But we must not overlook its primary goal. Corporate restructuring is essential to the future of our economy.

A low birthrate, aging population, and slow growth have become the new normal for Korea. Both exports and domestic demand are sagging. The only action the government has taken so far was increasing spending while the opposition has been clinging to the theory of “economic democratization.”

As the global economy is heading into unchartered waters, unprecedented navigation means should be tried. If not for the controversy over quantitative easing, the issue of corporate restructuring would have been shelved until the next presidential election. Now at least it’s off the shelf.

JoongAng Ilbo, Apr. 7, Page 30

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

Yi Jung-jae