A half-baked QE

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A half-baked QE

The debate on the so-called Korean version of quantitative easing — an election platform of the Saenuri Party that was believed to have been killed following the party’s election defeat — was revived by a word from the president. During a lunch meeting with chief editors of news organizations last week, the president said she approved of the idea floated by Kang Bong-kyun, former finance minister, who co-headed the campaign committee suggesting the central bank’s purchase of bonds from state bank and local banks to help fund corporate restructuring and de-leveraging in household debt. She suggested the approach should be “positively reviewed.” Yoo Il-ho, deputy prime minister for the economy and finance minister, indicated that the government could pursue the program.

The Korean version of quantitative easing — which differs from the type used by the United States, Europe and Japan, where there were no other monetary means to boost liquidity with the base rate near zero — would focus on corporate restructuring — instead of randomly aiming to stimulate spending and economy. No one would argue with concentrated efforts on restructuring. But the government has gotten the order wrong. It should first try to do whatever it can within its potential — creating public fund or supplementary budget.

The country’s monetary policy could risk losing credibility if the central bank’s monetary means are used on specific policies and sectors. The Bank of Korea indicated opposition to outside pressure to use its monetary power, saying resorting to quantitative easing should have the approval from the people first. Also, the government has not even come up with comprehensive restructuring outline. Various options are open: maintaining the status quo, merging business divisions or seeking foreign buyers and industrial-wide mergers. Funds would differ by billions depending on the plan chosen.

The government isn’t even clear on defining a local version of quantitative easing. Kang originally suggested having the Bank of Korea purchase bonds from the state-run Korea Development Bank and mortgage-backed securities issued by the housing corporation. But now it is specifically referred to as a program for restructuring. The government indicated that the central bank could directly invest in the state bank instead of buying bonds from it. In short, it can be done through special loans by the Bank of Korea. Quantitative easing option needs not be killed, but should not be the main agenda.

JoongAng Ilbo, Apr. 30, Page 26
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