(EDITORIAL from the Korea Times on April 8) - Liquidity Bubble

It is ironic that policymakers and regulators worry about excess liquidity even in the face of the still reverberating global financial and economic crisis.

It may look too early to ring the alarm bell on an oversupply of money. But the
chief of the nation's financial regulatory body issued a warning over the risks
of the just-forming liquidity bubble.
One may ask: how can such a bubble be formed amid an acute credit crunch caused
by the world's worst crisis since the Great Depression? But taking a closer look
at the present situations, one can easily find out that the bubble, which existed
well before the start of last September's global financial turmoil, has yet to be
burst.
Rather, policymakers have put more air into the bubble by injecting vast
liquidity into the banking sector, providing bailout programs to the business
sector, and launching massive fiscal stimulus packages. It was inevitable to take
proactive policy measures such as monetary easing and fiscal expansion in a bid
to contain the crisis.
The Bank of Korea (BOK) has slashed its key interest rate by a combined 3.25
percentage points to an all-time low of 2 percent since October 2008. It also
supplied several trillion won in liquidity support to commercial banks to ease
their credit pinch and expand their capital base. The government has also come up
with a series of fiscal stimulus packages to jumpstart the economy and create
jobs. Last month, it finalized a 29-trillion-won supplementary budget to finance
various public infrastructure projects and industry aid programs to boost the
recession-bound economy.
Critics have already warned the central bank and the government over their
efforts to tackle the crisis by only printing money. They have called for more
drastic financial and corporate restructuring to get rid of bad debts,
overcapacity and bloated operations in return for lavish state support programs
for banks and businesses.
In a speech to the Seoul International Financial Forum at the Shilla Hotel on
Thursday, Financial Supervisory Service (FSS) Governor Kim Jong-chang used the
word ``bubble'' to describe possible risks stemming from excess liquidity and
other factors. It is the first time that any regulator or policymaker has used
such an expression. Therefore, Kim's remarks indicated the liquidity problem has
already reached a critical point to threaten the financial system and the
economy.
His warning was also backed by a testimony by Strategy and Finance Minister Yoon
Jeung-hyun at the National Assembly that 800 trillion won is currently deposited
at short-term savings and other money market instruments. He also said the money
is ``excess liquidity.'' He added the government can absorb the superfluous money
by issuing state bonds designed to finance the supplementary budget.
The real problem is that the excess liquidity is not flowing to the real economy.
Instead, the liquidity is now finding its way to the stock exchange and the real
estate market. As a result, the composite stock index KOSPI has recently shown an
unusual rally and home prices have climbed, raising worries about the growing
bubble. It is really worrisome to see the bubble becoming bigger even before the
nation gets out of the crisis.
Now, policymakers and regulators should find ways to deal with the two
contradicting problems ??? the credit crunch and the excess liquidity ??? at the
same time. It is imperative that they do their best to contain systemic financial
risks to stabilize the banking sector and push radical corporate restructuring to
cure chronic economic ills.