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Natural antagonists

Oct 08,2018
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Bank of Korea Gov. Lee Ju-yeol on Sept. 27 expresses his views about the U.S. Fed’s decision to raise the benchmark rate. [YONHAP]
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Kim Jong-yoon
The author is an editorial writer of the JoongAng Ilbo.

A conflict is inevitable between an elected and non-elected power. Arthur Burns, a respected Columbia University professor, knew what kind of position he was stepping into when he accepted Richard Nixon’s proposal to chair the Federal Reserve Board after having served as his economic adviser. He wrote in his diary, “I knew that I would be accepted in the future only if I suppressed my will and yielded completely — even though it was wrong at law and morally — to his authority.”

Nixon made it pretty clear that he did not trust the central bank but did trust Burns to take his orders. He said nominating Burns was a “standing vote of appreciation in advance for low interest rates and more money.” On the day Burns took the oath in January 1970, Nixon said he had “strong views” on the economy and, “I can assure that I will convey them privately and strongly to Dr. Burns … I respect his independence. However, I hope that independently he will conclude that my views are the ones that should be followed.” Nixon begged and pressured Burns to keep the spigots open at least until his bid for a second term in 1972.

The central bank has the mighty authority to print money. “There have been three great inventions since the beginning of time: fire, the wheel, and central banking,” American humorist Will Rogers said.

Excess money can fan inflation. A shortage can depress the economy. The common goal of central banks is to stabilize prices. Elected leaders are always tempted to boost the economy to earn favor from voters. This is why independence of the central bank is essential. It is also why the chief of the central bank cannot be elected.

Bank of Korea Governor Lee Ju-yeol is in a dilemma. The ruling power blames low interest rates for fueling a real estate market it wants to tame. Higher interest rates would cool the real estate market. But given the overall weakness of the economy, tightening right now can be dangerous. Interest rate changes are not a precision missile that specifically aims at one target, but rather a bomb that can wipe out an entire territory.

Appointed by former conservative president Park Geun-hye, Lee won the confidence of liberal President Moon Jae-in, who removed everyone else from the administration of his ousted predecessor. He’s now in his second term. Lee already has a record of being politically swayed. Former deputy prime minister for the economy Choi Kyung-hwan bluntly called for more aggressive actions from the central bank to aid the economy when he took the job in July 2014. Choi met with Lee later in the month, but claimed interest rates had not been discussed since they are the purview of the central bank. Yet in a monetary policy meeting in the following month, the benchmark rate was cut by a quarter of a percentage point for the first time in 15 months.

After attending the G-20 meetings of finance ministers and central banks in Australia a few weeks later, Choi said he drank wine with Lee but claimed they had not discussed interest rates. Yet again in the following month, the Bank of Korea’s monetary policy meeting brought down the key rate.

Coincidentally, following muffled complaints about cheap rates getting in the way of the government’s battle with runaway housing prices, Lee said last week that “financial imbalance” has worsened due to rising household debt and called for “gradual” efforts to solve the matter, hinting at the possibility of a rate hike. The central bank stood firm even as the Fed raised rates twice in the first half, saying domestic conditions should guide its monetary policy, not overseas factors.

President Jimmy Carter, who started his presidency when the great inflation of the late 1960s was exacerbated by the oil shocks of the 1970s, appointed hawkish Paul Volcker to chair the Fed in 1979. Volcker was ruthless in raising interest rates even as a recession worsened and unemployment jumped. Politicians demanded a stop to the massacre, but Volcker did not waver. In the end, inflationary pressure was reversed. His campaign proved right. As zombie companies subsisting on cheap credit were cleaned up, the U.S. economy entered the Great Moderation period in the 1980s.

Volcker is still lauded as one of the most competent central bankers, but Carter did not share his accolades. He lost his reelection bid. An elected leadership is that vulnerable. The Bank of Korea Act mandates monetary policy must be executed with neutrality and independence. An economy cannot run well if the governing power pressures the central bank and if the central bank cannot play its independent role.

JoongAng Sunday, Oct. 6-7, Page 34