Federal Reserve officials are generally good at learning from their past successes and failures. They are less skilled, however, with study abroad peers with a better understanding of the moment in global economics.
This may be the case with the Bank of Korea in Seoul, which has just raised interest rates. second time since August. In other words, the BOK is acting as the Fed talks. As Powell’s team debates whether the rising inflation around them is real, Governor Lee Joo-yol’s staff is not taking any risks.
To overcome the asset bubble and prevent inflation from rising further, Lee’s BOK is channeling Paul Volcker’s Fed as Powell tries his hand at an experiment like Alan Greenspan.
I don’t want to overplay the point. Lee is hardly going to push Korea into recession, as Chairman Volker did in the late 1970s and early 1980s. Nor does Powell gamble, like Greenspan, that productivity is rising faster than the data suggest and that inflation will fade as technological disruption saves the day.
But Lee’s tough moves remind us why central bankers were more discredited before the mid-1990s than they were celebrated. Eventually, Volker received death threats for such high driving rates.
Something changed around 1995, when Greenspan and German partners in the Bundesbank and elsewhere became, well, financial rock stars. If you think that’s an exaggeration, Google dates back to the late ’90s when Greenspan was being featured in People magazine alongside Leonardo DiCaprio and the Spice Girls. His 1997 marriage to TV reporter Andrea Michele made more headlines than Robert De Niro or Cate Blanchett’s walk down the aisle.
This celebrity came at a serious cost. Because of this, and because of a great economy at the time, Greenspan became a folk heroA seer who was not to be questioned by a lesser mortal. When Greenspan asked Congress to end the recession among savings, commercial and investment banks, Congressmen said yes sir.
In the early 2000s, Congress dutifully cut taxes because, as Greenspan said, oddly enough, budget surpluses were bad. It was only when Lehman Brothers split in 2008 that Washington realized that it was not wise to essentially delegate economic strategy to one person.
The Fed, however, approached the Greenspan era under Powell. After first being tapped for president in early 2017, Powell remains on the tightrope of predecessor Janet Yellen.
After some mean tweets and Donald Trump’s threats to sack Powell, the Fed started cutting rates. Barack Obama gave the will to Trump despite the multi-year extension. Massive tax cut package under Trump.
Those moves left the US with little monetary ammunition when Covid-19 hit. But the bigger problem is the way ultra-loose monetary policy distorts the stimulus structure. Ask Japan how the average wage or zero rates for innovation is working for 21 years. not good.
Nobel prize winner Joseph Stiglitz ICalled on central banks to do more to fight inequality. But Japan demonstrates how doing too much of monetary authority can have the opposite effect. Aggressive policies have attempted to make wealthy property owners prosper at the expense of everyone else.
Excessive monetary support forces governments to take responsibility for restructuring economies to increase competitiveness and make growth more inclusive. It relieves CEOs from the urgency to innovate and recalculate the business model.
In Seoul, Lee’s BOK is going the other way. Although Korea does not face the inflation problems of the US, Lee is signaling a “last call” to the country’s politicians and warlords. It’s a central banker’s job, after all, to shoo away the proverbial punch bowl because the party just gets underway.
One problem that Lee is trying to address is runaway home debt and other credit-related imbalances. Regulators have tried to cool things down with traditional “macro prudential” tweaks in leverage and taxes. Commercial banks have been forced to make choices regarding mortgage loans.
Has helped a little. At the end of 2019, the household debt-to-GDP ratio exceeded 90%. Home loans also broke records. Therefore, on the margins, the BOK rate hike could be just a warning signal to the industry.
It’s also a sign for the president moon jae-in It’s time to put some improving wins on the scoreboard before he steps down in May. Since 2017, Moon has relied on Lee’s ultralow rates as much as Trump has relied on Powell.
Neither economy is any better after years of keeping central bankers under control. But at least we’re seeing an attempt by BOK to be the adult in the room in Korea. Powell’s Fed can learn from Lee’s gambling. If listening.