(EDITORIAL from the Korea Herald on Feb. 16)

No easy way out

When the central bank recently cut its benchmark rate by 50 basis points to 2
percent, the lowest ever, its governor did not rule out the possibility of
another rate cut. Instead, he hinted that it could come after a couple of months,
if not next month.

"Monetary policy will focus on improving liquidity conditions and preventing the
economy from contracting by an unwarranted amount. We will determine what to do
about the policy rate after watching how the financial market reacts (to the
latest rate cut)," he said.
His remarks, which came at a time when concerns about a liquidity trap were
already being voiced, are testimony to one of the severest economic crises the
nation has ever undergone. They are also a reminder that there is no easy way out
and that economic players are required to do what may be inconceivable under
normal economic conditions.
What the central bank has done in the past and is planning to do in the future is
nothing short of "bold and preemptive action," the kind of move President Lee
Myung-bak's administration has repeatedly promised in the past but has often
hesitated to take. One such example is the administration's housing policy.
Since the nation was drawn into a global financial crisis in September, the
administration said it would slow the slide in property prices by removing
regulations against property speculation and thus resuscitating the housing
market.
But the administration did nothing but drag its feet. It was just last week that
the administration agreed on what action to take with the ruling Grand National
Party. Still worse, sorely missing from their agreements is a key issue - whether
or not to delist Seoul's premium residential district south of the Han River, or
Gangnam, as the speculation-prone zone.
In its fight against property speculation, the previous Roh administration
intervened in the pricing of apartments. It also dampened property transactions
by putting restrictions on funding purchases in the districts it had designated
as speculation-prone zones.
The Roh administration restored price stability by putting the caps on apartment
prices and taking other measures in September 2007. But the flipside was a market
downturn and a sharp increase in the number of unsold new apartments. Moreover,
trades came to a near standstill in Gangnam.
The housing market went into a tailspin when the economic crisis set in. Some
small and medium-sized homebuilders have since been forced of business. Others
have been placed on workout programs or put under the tighter scrutiny of their
creditor banks.
Even those who are not experiencing a credit crunch are scrapping or delaying
their housing projects. They may have few other options in these times of
economic crisis. But the problem is that the decline in housing projects will
result in a severe shortage of apartments, followed by property inflation, when
the economy turns around.
Against the backdrop, the Lee administration and its party agreed last Thursday
to remove the pricing caps. They went one step further when they decided to waive
the capital gains tax from those purchasing apartments in places other than in
Seoul. They also agreed on a 50 percent tax cut in the case of new apartments in
Seoul.
The administration and the party, however, deferred a decision on the issue of
delisting Gangnam as a speculation-prone zone. By doing so, they were attempting
to deflect criticism from the opposition, which claimed that such action would
make the rich even richer.
But they will have to take bold action if they wish to turn the economy around
quickly, and all the more so, given that Gangnam has in the past been the
bellwether of a housing market recovery.
(END)