[Editorial] Ill-advised policy

By Korea Herald

Park planning to boost housing market for recovery

  • Published : Jul 18, 2014 - 20:46
  • Updated : Jul 18, 2014 - 20:46
Domestic demand is weak. It is so weak that the administration is attempting to resuscitate it by any means possible. Some of the efforts, however, are more laughable than laudable.

One such example is a ban on government employees taking overseas holiday trips. Schoolteachers and other government officials have been told to exercise self-restraint about going out of the country for summer break, with “self-restraint” being a euphemism for an outright ban in the Korean bureaucracy.

In addition, the administration is soliciting help from the Federation of Korean Industries and other leading business organizations in encouraging corporate employees to join the campaign. It is also encouraging both government officials and corporation employees to take one or more additional day off.

This campaign sounds ludicrous. Few believe it will have any palpable impact on recovery from the slump. Households, many of them highly indebted, do not have much to spend on their holidays in the first place. For this reason, it may also be denounced as a telltale example of showing off.

Yet, the campaign will do little harm to the economy though its restrictions on individual freedom are subject to debate. But some other policies will do more harm than good.

A case in point is the administration’s decision to encourage households to take on more debt to buy homes. It says it will ease restrictions on home financing ― evidence it has learned no lesson from the Great Recession, which was precipitated by a housing bubble in the United States.

President Park Geun-hye is demanding that measures be taken to help boost the housing market to bring about a recovery. She claims that debt-to-income and loan-to-value restrictions, adopted to dampen an overheating housing market long ago, have outlived their mandate. Apparently with her falling approval ratings in mind, she says the general public will not be able to benefit from an economic turnaround until the housing market has regained vitality.

Her new deputy prime minister for economic affairs, also serving as finance minister, echoes her desire to speed up the recovery when he says he will boost the housing market and, by doing so, increase domestic demand.

But he is overriding advice from financial regulators when he says the debt-to-income and loan-to-value restrictions will either be lifted or eased. It was barely a month ago that the financial watchdogs opposed a proposal to ease the regulations on the grounds it would raise the level of household debt, which is already dangerously high, and run the risk of undermining prudential banking.

Households will undoubtedly spend more if their mortgaged homes gain in value, which would in turn help accelerate growth. But no such growth would be sustainable, as was witnessed when the U.S. economy plunged into crisis when the housing bubble burst in 2007, triggering the Great Recession.

It is historically proven that real-estate bubbles are followed by financial crises. Park and her chief economic policymaker may claim it is different this time. If memory fails to serve, however, they should be reminded that, even without real-state bubbles, the nation is still vulnerable to a financial crisis, with household debt having already surpassed the 1,000 trillion won mark.