[Initial Insight] Policy is about 'Responsibility,' not 'Authority'

Among all the chairs of the United States Federal Reserve Board, he was the tallest (201cm) and became known as the ‘inflation fighter’ who raised the benchmark interest rate by 400 basis points (1bp=0.01%) amid soaring inflation caused by the so-called ‘Nixon Shock’ and ‘Oil Shock’ stagflation, earning the nickname ‘the man who raised rates as tall as his height’ from economic experts worldwide. He was critical of Milton Friedman’s monetary policy theory and remains an indispensable figure in discussions on inflation management policies today. He is Paul Volcker, an American economist and the 12th Chair of the Federal Reserve.

Volcker did not relent in his high-interest-rate policy to curb inflation. During his tenure as chair, market interest rates soared to an all-time high of 21.5% per annum, and mortgage rates exceeded 18% per annum. This was the highest interest rate period in U.S. history. Despite various political inducements and threats from armed assailants that nearly led to tragic incidents, he maintained his high-interest-rate monetary policy even while carrying a pistol himself.

His conviction entailed tremendous pain but sent a clear message to the market and economic agents. He made it clear that there would be no change in monetary policy unless inflation, which was above 10%, decreased. As a result, the so-called ‘Volcker Coup’ succeeded and laid the foundation for a period of economic boom in the U.S. Volcker reflected in his memoirs that policy is about ‘responsibility’ rather than ‘authority’ and emphasized the need for a ‘competent government’ that benefits the lives of the people.

In July 2024, the Korean economy remains stuck in debt management discourse. At the center of this discourse is undoubtedly household debt. Recently, doubts have even been raised about the government’s commitment to managing household debt, and the entire financial sector appears to be in disarray. The government’s plan announced earlier this year to apply the stress Debt Service Ratio (DSR) was scheduled to be strengthened from phase 1 to phase 2 starting in July but was abruptly postponed a week before implementation. The phase 3 application, which fully reflects the stress interest rate, was also delayed by six months from January to July next year, explicitly described as ‘tentative.’

Moreover, the market was informed of the stress DSR postponement through press releases and briefings at the team leader level. Frontline financial institutions had to urgently revise their coefficient management plans and business strategies, while consumers had to reconsider their loan plans.

Meanwhile, the household debt management target quietly shifted to align with the nominal Gross Domestic Product (GDP) growth rate. At the beginning of the year, the government and banking sector publicly announced a household loan growth management target of about 1.5?2%. However, after household loans surged by 14 trillion won over the past three months, the target was revised to about 2?3% excluding policy loans, and household debt review meetings were hastily increased. They also launched inspections to check whether the phase 1 stress DSR system was properly implemented and whether policy loans were conducted normally.

Kim Byung-hwan, nominee for the Chairman of the Financial Services Commission, is responding to questions from lawmakers at the confirmation hearing held by the National Assembly's Political Affairs Committee on the 22nd. Photo by Kim Hyun-min kimhyun81@

There have been continuous criticisms that the government’s goals are confusing given these processes. Doubts have also been raised about whether the planned measures will be implemented as scheduled. Additionally, there are claims that the government is complacent due to an optical illusion caused by applying new GDP statistics, which lowered the household debt ratio from over 100% to 93.5%.

The increase in policy uncertainty is not limited to household debt. Concerns are significant regarding the restructuring of the real estate project financing (PF) market, policies for vulnerable groups and small business owners, and ongoing financial accident-related policies. Once trust in policy is lost, it inevitably causes unpredictable side effects. Now, the responsibility for that trust falls on Kim Byung-hwan, the nominee for Financial Services Commission Chair, who completed his confirmation hearing on the 22nd.