Bernanke's Seoul Brothers; Loose money in America, capital controls abroad.
Another monetary-policy domino fell Tuesday when Seoul introduced a new round of capital controls. South Korea's financial regulators will reduce the amount of foreign-exchange forwards that banks can carry on their balance sheets. These are commitments to buy and sell Korean won or dollars at a future date, and the decision will constrain the ability of banks to serve as counterparties for rapid capital inflows. See what Ben Bernanke hath wrought?</br></br>Although Seoul has a history of competitive devaluations, this week's move should be seen in a different light. The announcement steered clear of any direct reference to the Korean won's value, homing in instead on "volatility." And no wonder. The won has risen some 9% against the greenback since May. The country's economy is relatively strong, and despite recent interest-rate cuts, returns on capital invested in won remain well above America's super-low rates. This encourages more capital inflows, which in the extreme could destabilize the financial system.</br></br>That isn't to say that Seoul's move is good policy in theory or will prove effective in practice. Capital controls mainly distort flows of capital, leading to inefficiencies and often other economic distortions.</br></br>One reason the won has been a volatile currency is Seoul's history of capital controls: Investors pile in when times are good, then rush back out at the first hint that regulators might impose controls. Seoul hasn't helped with its promises this week to continue "monitoring" currency volatility--a reference to the possibility of future controls that could in turn spark a capital outflow.</br></br>But in this case Korean leaders--and central bankers around Asia--deserve some commiseration as they struggle to control a tsunami not of their making. Washington traditionally discourages capital controls, but this is a harder case to make when Mr. Bernanke and the U.S. Federal Reserve flood foreign economies, many of them developing and with unsophisticated financial systems, with dollars.