By Kim Jae-kyoung
Staff Reporter
The global economy is facing the worst economic downturn the world has witnessed since the Great Depression of 1929. Financial markets are in serious condition and governments across the globe have taken unprecedented action to ward off a deep recession.
In each of their countries, central banks, including the U.S. Federal Reserve, are taking the lead in repairing the damage inflicted on the economy by deploying all possible options, including deep rate cuts and direct liquidity supply.
In contrast, the Bank of Korea (BOK) has been relatively passive on both monetary easing and liquidity supply without any preemptive measures, which have put it at the center of public criticism here.
Since the beginning of this year, the BOK has slashed its base rates three times by 125 basis points to 4 percent, while the Fed cut its key rates six times by 325 basis points to a historic low of 1 percent.
In addition, the U.S. Fed is directly supplying liquidity to banks through direct bond purchases to make more credit available to the real economy. The BOK, however, is not considering such an unconventional option.
Market analysts said that the difference in magnitude of rescue efforts between the BOK and the Fed stems from a divergent appreciation of economic situations they are facing.
``I think the U.S. economy is in a virtual coma. That's why the U.S. Fed has brought its economy to intensive care units and given it a series of first-aid treatments,'' Citigroup economist Oh Suk-tae told The Korea Times.
``I don't think that the Korean economy is in much better shape. The problem is that most of the BOK's measures are designed to cure normal patients,'' he added. ``That's why its policies have had little effect on the economy.''
Current financial markets clearly highlight this. Despite the central bank's series of rate cuts, bond yields have been rising, while stock and currency markets still remain highly volatile.
Such a clumsy, belated response is the result of the BOK sticking to the original goal of monetary policy _ controlling inflation, and at the center of this policy is BOK Governor Lee Seong-tae.
Like Paul Volcker in the U.S., the former U.S. Federal Reserve Board Chairman during the late 1970s, and now officially an economic adviser to the incoming Obama administration, Lee is famous as a hardnosed inflation fighter here.
His hawkish stance is well manifested in the course of monetary policy over the past few years. Since he took office in April 2006, the central bank made no rate cut until Oct. 9.
Even when the U.S. Federal Reserves and other central banks turned to aggressive monetary easing, the BOK kept its policy rate untouched on concerns over inflation.
The BOK played down such criticism, countering that it has taken the necessary steps in a timely manner whenever needed.
``If the situation gets worse, we will look at unconventional tools. But I'm not sure if we are currently in such a crisis situation,'' a senior BOK economist said, asking not to be named.
``The BOK should not carry out policies in response to every call from the market. Doing so would leave the economy facing a heavier burden later on,'' he added.
However, market experts claim that since the Korean economy is already facing severe downside risks, it is time to take a much more drastic step to stimulate it.
``Unless new, effective and strong measures are taken to get money directly to real economy participants, this problem can spiral worse and worse out of control,'' Market Force Company CEO James Rooney told The Korea Times.
``In these current circumstances, there is little that the government can do by using traditional tools of intervention. They just do not work,'' he added. ``The government should find ways to directly supply credit to real economy market participants, such as direct lending to individuals and businesses.''
Oh, of Citigroup, pointed out that a key uncertainty in monetary policy is whether the BOK will implement "unconventional" policy tools, such as the direct purchase of government bonds or even credit products, following the US Fed.
``The BOK seems to think that 5 trillion won liquidity support for the Bond Market Stabilization Fund is sufficient for now. But we continue to believe that the BOK will eventually adopt these unconventional tools as financial stress continues and the growth outlook worsens,'' he added.