SEOUL -- Former U.S. Federal Reserve Chairman Alan Greenspan has been criticized by some for his "intentional" bubble-forming in the United States to counter the burst of another bubble.
Greenspan's terrible blunder may be likened to Bank of Korea ( BOK) Governor Lee Ju-yeol and six other members of the monetary policy board, who decided Thursday to cut the policy rate by a quarter percentage point to 1.50 percent.
The BOK entered an uncharted territory in March as it lowered the benchmark rate below 2 percent for the first time in history. A month later, household debts posted the largest monthly increase in history on surging demand for mortgage loans amid the lowest lending rates.
Governor Lee "unusually" talked of a shared view among the policy board members during the press conference, saying that efforts at structural reform would be essential for a sustainable growth and that it would need to deal more actively with household debts as the additional rate cut serves to expand the liabilities.
Despite the shared concerns, the rate cut came as the outbreak of the Middle East Respiratory Syndrome (MERS) was feared to erode the already lackluster economy caused by faster fall in exports and fragile domestic demand.
MERS infections increased to 122 on Thursday since the first case was identified on May 20. Consumers refrained from going outside for shopping, and many of social and political gatherings were canceled.
As the central bankers mentioned, the country's fragile domestic demand stemmed mainly from structural factors such as aging population, low birth rate, concerns about after-retirement life and low pay that cannot be tackled with low interest rates.
The accelerating fall of exports cannot be prevented by the central bank's accommodative monetary policy as the global economy has yet to get back on a full-fledged recovery track.
The "ineffective" rate cut was reminiscent of the Fed headed by Greenspan for 18 years from 1987. To counter the dot-come bubble burst in 2000 and the Sept. 11 terrorist attack in 2001, the U.S. central bank had maintained the federal funds rate below 2 percent for an extended period of time.
The record-low rates caused a "dangerous" illusion, called a wealth effect, that U.S. consumers spent more money as they thought of themselves as being richer than they were due to higher home prices caused by the low rates.
In the United States, consumers borrowed money to purchase home with the lowest interest rates at that time as is now the case with South Korean consumers.
The illusion turned out to have been the most dangerous after the 2008 global financial crisis erupted. Greenspan was described by some as a criminal offender for creating a bubble in the housing market.
The BOK opened a door to the Fed-style bubble-forming path. During the Greenspan era, the Fed's rate cuts were made to counter the dot-com bubble burst, but Greenspan was blamed for his reaction to a bubble with another bubble.
Now, South Korea doesn't even have any bubble burst. It would be very hard to say the South Korean economy is in a serious state of crisis. Even during the 2008 financial crisis, the BOK's policy rate stayed above 2 percent. "It is true that concerns exist about a bubble caused by an increase in household debts. It is also true that such worries become stronger when excessively depending on monetary policy," said Governor Lee.
