Let Money Circulate

Government Should Use Carrots and Sticks More Boldly

The Bank of Korea's additional reduction of its benchmark interest rate to a record low of 2 percent has been all but assured, given the economy's free fall.

Less assuring is whether the steepest rate cuts in the shortest span of time ever would ``work" as intended by encouraging people to consume and goading businesses to invest. Many economists here, including even BOK Governor Lee Seong-tae, appear rather uncertain if his glum look on Thursday could be read as such.

Lee ruled out as premature rising concerns about a ``liquidity trap," economic jargon referring to situations in which orthodox monetary policy, such as financial authorities pulling down interest rates to nearly zero, can no longer affect demand.

The top central bank may be right, at least by ostensible figures, as some money market rates are still ``responding" to changes in the policy rates. The problem is, the bulk of idle funds _ which some analysts estimate to be worth as much as $500 billion _ are circulating within the short-term money markets instead of reaching out to individual and corporate borrowers, causing what market players call ``monetary sclerosis."

Commercial lenders, increasingly afraid of risk, are busy improving their capital adequacy and asset soundness levels, while businesses park cash reserves only in safe assets. Behind all the fear and reluctance is uncertainly about the economic situation in general and the government's capacity and policy to weave through this crisis in particular.

So it seems the government was right when it decided to guarantee all debts owned by small- and medium-sized corporate borrowers.

Come to think of it, however, should we call these lenders commercial banks if they extend credits only when the government covers each and every risk involving their most basic operations? The government has even set up a fund to help banks bolster their inadequate capital bases.

The Korean banks' selfish and short-sighed business practices are no longer news, epitomized by the proverbial ``lending umbrellas when it shines and snatching them away when it rains." Banks have long been assigned to complete corporate restructuring by salvaging firms with short-term liquidity problems but long-term profit-making potentials, while letting hopeless firms sink without wasting any more time, but the progress is also too slow to expect results anytime soon.

So, the new economic team's foremost task is to reduce uncertainty caused by delayed corporate reforms through rewarding banks actively cooperating with government's policy while putting at a disadvantage those which are not.

New Finance Minister Yoon Jeung-hyun has rightly said he would focus on a few core tasks instead of launching too many projects and leaving most of them unfinished.

Making banks perform their roles and letting money freely circulate among various economic players should be a good start.