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How excess liquidity helped in South Korea

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I received a comment yesterday which directed me to a page containing an article written by Ron Paul blaming the Fed and excess liquidity for the causes of the financial meltdown.  While I do agree that the Fed under Greenspan failed to raise interest rates when needed, I think criticism of monetarism has gone overboard. 

More to the point, South Korea just released figures for its first quarter growth, and it’s quite impressive; they’ve managed to avoid a recession by growing at 0.1%.  That contrasts starkingly with Singapore’s 11.5% contraction in the same period.  The WSJ reports:

SEOUL — South Korea’s central bank said Friday the country’s economy averted a recession in the first quarter of this year on unprecedented interest-rate cuts and government spending.

Gross domestic product rose a seasonally adjusted 0.1% in the January-March period from the fourth quarter of 2008, when the economy shrank 5.1% from the earlier quarter, the Bank of Korea said.

Financial Times carries a similar report:

The central bank has scythed rates by 3.25 percentage points since October to 2 per cent and economists had warned further cuts could lead Korea’s battered currency into even choppier water.

The government has also been pumping money into the economy, front-loading the budget, funding public building projects and setting up a bank recapitalisation fund to encourage lending. Construction, fuelled by public contracts, rose 6.1 percent compared with the previous quarter.

Some will undoubtedly dispute that lowering interest rates (and hence increasing liquidity) coupled with government spending was really behind the cause of this, especially since this is the government’s conclusion.  But I haven’t really seen any evidence to the contrary.  It’s clearly too early to celebrate though.  It’s not evident that the nature of the recession for South Korea is U-shaped, so I doubt one could say that they’ve “bottomed out”.

After all it makes sense for the government to unfreeze credit markets during a recession so the economy could be jumpstarted.  I believe some would say this makes the case for stimulus spending and rate cuts. Of course one simply can’t propose this solution to every country, since it won’t work for America whose interest rates (thanks to Greenspan) was already very low to begin with.

Written by defennder

April 24, 2009 at 11:03 PM

Posted in Uncategorized

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