The Fed Wants to Test How Banks Would Handle Negative Rates

http://www.bloomberg.com/news/articles/2016-02-02/rates-less-than-zero-is-bank-stress-fed-wants-to-test-in-2016

by irln • 10 years ago

85 168 10 years ago

pc864• 10 years ago

Let's assume rates reach a point such that personal savings accounts have an interest rate of 0% or negative. How is this any more an incentive to spend than it is an incentive to have a box with thousands of dollars in cash under your bed?

Jtsummers• 10 years ago

You may not spend, but you might invest. The options at that point are:

  0% Bank accounts
  0% Mattress/Freezer
  ?% investments (stocks, bonds, direct to businesses)

marcosdumay2• 10 years ago

More like:

-0.3% Bank account 0% Mattress [-100%..0%] Investments

No government goes into negative rates when the times are good.

mayukh• 10 years ago

Presumably negative rates are a response to deflationary concerns. Under that scenario, cash under the bed would lose value faster than it would in a savings account
As a borrower you are getting paid to borrow, thats a good incentive to go spend..

AnimalMuppet• 10 years ago

Presumably negative rates are a response to deflationary concerns. Under that scenario, cash under the bed would lose value faster than it would in a savings account

False. In deflation, cash gains in value.

schoen• 10 years ago

At some point, people might be afraid that the cash will be stolen or destroyed in a fire or something, and not think the risk is worth it. (But it seems like an easier compromise option might be to find a bank somewhere in the world that offers a non-negative interest rate and try to transfer the money to an account there. Though in the specific case of Americans, some foreign banks don't want them as depositors now because of U.S. account disclosure regulations.)

URSpider94• 10 years ago

For individuals, this MIGHT be an option, though you would really have to consider the implications of storage, anti-money-laundering regulations, and security.

As for transferring overseas, you now have to consider the significant added risk of currency fluctuations, which over the mid-term can easily swamp out any impact of interest rates.

gtrubetskoy• 10 years ago

It's an incentive for the bank to have as little money as possible. The banks will do everything to get rid of cash, which, in theory, should devalue the currency.

Bottom line: negative rates are all about devaluing the currency against other currencies in the world so that the exports become cheaper.

lasermike026• 10 years ago

I wonder what it would do to commodity prices?

morgante11• 10 years ago

The banks will do everything to get rid of cash, which, in theory, should devalue the currency.

Not necessarily. Far more likely is to encourage investments or holding cash-equivalents (bonds). Most banks are not going to engage in currency speculation merely because of a negative interest rate.

Bottom line: negative rates are all about devaluing the currency against other currencies in the world so that the exports become cheaper.

No. That is not the goal of negative rates. The goal of negative rates is to encourage investment and spending, not to devalue the currency. The government has much more direct means for devaluing the currency if that's the goal.

marcosdumay2• 10 years ago

Eh, well, it's either inflationary or deflationary... Depends on how people react.

Taking your money out of the banking system (as paper into a box) is extremely deflationary. In most places you'll take around 10 times more money from circulation than what you put on the box, but the US keeps this multiplier much higher.

bradleyjg4• 10 years ago

You can put a box with a thousands of dollars under your bed, but a company that needs to hold onto a few million to make payroll can't just put it under their collective beds. Maybe they decide to put it in the money market, which invests in commercial paper, instead of a bank which parks it at the Fed.

SCAQTony3• 10 years ago

If I was a company faced with that problem I look to see if I could take the money off shore and pay through wire transfers if the fees were cheaper than the negative interest rate being charge.

JoshTriplett3• 10 years ago

There's a huge difference between a negative federal funds rate and a negative savings account interest rate. The former means banks get paid to borrow money; crazy, but maybe not broken in the instant-implosion sense (would need further careful consideration). The latter means savings accounts charge a percentage of the balance to maintain that balance; that would produce runs on the bank. I know I'd pull 100% of my money out of any bank that tried to pull a stunt like that.

cbr• 10 years ago

Are you sure you would pull your money out if all the banks started charging -0.1% annual interest? If you have your money in your house there's a higher risk of theft, more than enough to counter the -0.1%. Add in the inconvenience of moving large amounts of money around by hand, not being able to write checks, and no automated bill pay, and I'm still keeping my money in the bank.

ojbyrne• 10 years ago

Do you have money in a checking account? Since there still is some inflation, checking accounts pay a negative rate, after inflation. In fact its even pretty hard to find a savings account that pays > inflation rate.

dragonwriter9• 10 years ago

Let's assume rates reach a point such that personal savings accounts have an interest rate of 0% or negative. How is this any more an incentive to spend than it is an incentive to have a box with thousands of dollars in cash under your bed?

Having a box with thousands of dollars in cash under your bed is, itself, an incentive to spend (specifically, on goods and services related to home security, protection of dollar bills from vermin, flooding, etc., and similar things.)

So those two things aren't opposed options.

SCAQTony3• 10 years ago

Exactly, my savings account would be deleted immediately and shoved into tax free or inflation protected bonds.

I bet many banks when confronted with those individuals that have savings account with $200,000 cash as an emergency fund will either pull them out entirely or pay the bank for a safety deposit box.

pc864• 10 years ago

Storing cash is a safe deposit box is illegal in the United States.

Edit: maybe

morgante11• 10 years ago

For one thing, there are assumed costs with storing cash under your bed. (Fire, risk of theft, transaction costs, etc.) There's a reason that banks/anyone will generally charge you to store valuable goods (in a safety deposit box).

Given the implicit costs of storing cash, a low-interest bond or investment looks better.

SilasX4• 10 years ago

I want to know how bankers would handle negative salaries.

Edit: Sorry if that sounded snarky, it was my attempt at a witty way of saying, "it doesn't make sense for there to be a negative price for provision of a scarce good, imagine if we did that to labor, like yours".

dragontamer2• 10 years ago

Sour Crude in some areas of the US hit negative values a few weeks ago. It means that supply has grossly outstripped demand, and that storage of the good has become the primary cost.

In the case of banking, it means that liquid cash has become so worthless (ie: too many people are saving money) such that the Banks are now charging you for the privilege of keeping the money safe.

SilasX4• 10 years ago

Even so, something is fundamentally wrong if markets are signaling, "no, we'd rather you not lend us money to work with", even if the fix lies somewhere else. We should never be at a state where "forgoing the use of money so that others can invest it" is a non-scarce good.

(A charge merely for having physical banknotes on demand can make sense, of course.)

In contrast, there are sane worldstates that correspond to "sour crude provides economic value less than its upkeep cost".

valakon• 10 years ago

In the scenario described, money is no longer a scarce good. At 0%, they couldn't give it away (to banks). When it is negative, the fed is paying banks to take it.

SilasX4• 10 years ago

Even then, negative doesn't make sense as a market price. Give me X dollars, and I only have to return Y such that Y is less than X? "I'll have infinity, thanks!"

lr• 10 years ago

I think we already have that... It's called "bank fees", i.e., depositors pay the bank to keep their money instead of the bank paying interest.

pc864• 10 years ago

To what fees specifically are you referring? If you mean things like low balance fees or overdraft fees I think they're both appropriate when they're not implemented or marketed in a predatory manner.

I'm not aware of any fees that are instituted "instead of the bank paying interest" unless you're talking about something like a low balance fee on a non-interest bearing checking account.

IgorPartola5• 10 years ago

Most big banks in the US have monthly fees for keeping your money in an interest-free checking account. This ends up costing you something like $5-25/month unless you (a) also set up direct deposit with them or (b) maintain a minimum balance that is typically relatively large. This is why I keep my money with a credit union instead: better customer service, better rates, no stupid fees.

Edit: for example, https://www.bankofamerica.com/deposits/checking/personal-che...

tosseraccount• 10 years ago

Hidden credit card fees. People you buy from pay it.

Johnie2• 10 years ago

This is already happening with large institutional depositors: http://www.wsj.com/articles/big-banks-to-americas-companies-...

IgorPartola5• 10 years ago

My jaded view would be that the banks would just borrow free money, but not pass anything onto the consumers, instead using it for more high risk trading. Seems to me that the government has a much better way to stimulate the economy: lower rates on existing student loans. If the Fed can afford to give negative rates to the banks, shouldn't it follow that the DoE can afford to give negative rates to students?

wdewind2• 10 years ago

but not pass anything onto the consumers, instead using it for more high risk trading

The economy was destroyed by passing it onto the consumers through subprime lending (and a bunch of other things - not trying to assign fault for the subprime crisis here), so high risk trading is not mutually exclusive to passing it onto consumers.

IgorPartola5• 10 years ago

The economy was destroyed by (a) fraudulently selling subprime mortgages as mostly AAA-rated, and (b) default credit swaps, which totaled a lot more than the mortgages themselves. I don't see your point.

darryl42• 10 years ago

and the banks calling subprime AAA+ no risk loans

maxxxxx4• 10 years ago

I think you are onto something but lowering student loan rates would probably just cause even higher tuition.

How about incentives for companies to pay their employees better? I know it's sacrilegious to even think such a thing...

IgorPartola5• 10 years ago

Well, there is a pretty large existing population of college grads who cannot afford to spend much because of the existing debt. Most proposed regulation (that I think has no chance of passing) talks about new loans. Immediately lowering rates on existing loans would actually give millennial more spending money.

As for tuition skyrocketing, I think that will slow down or even reverse soon. Colleges thought that they could raise rates now, and expect the economy to catch up with higher salaries later. That didn't happen. In fact the opposite happened: the economy tanked, and a bunch of people were left with lots of debt and jobs that can't support it. I think the market will correct itself, especially as online/remote education becomes more prevalent, state schools show that your earning potential is not really linked to the prestige of your school's name anymore, etc.

nickff10• 10 years ago

The only incentive that will effectively cause companies to pay their employees better is more demand for labor, which is most likely to be caused by increased economic growth. Most other programs end up being more complicated and costly than earned income tax credits and other methods of redistribution.

stcredzero• 10 years ago

I think you are onto something but lowering student loan rates would probably just cause even higher tuition.

How about lowered student loan rates with an inflation adjusted cap? Then perhaps schools would be motivated to increase the number of students educated, as opposed to getting more money out of each student.

thescriptkiddie2• 10 years ago

lowering student loan rates would probably just cause even higher tuition

Only at for-profit schools, which are currently a small fraction of all universities.

DanielBMarkham• 10 years ago

Not sure where I read this, but aren't the banks pretty much doing that right now? Picking up the credit and buying T-bills with it? Good for banks, the Fed gets to say it's stimulating the economy, somebody is buying the debt, and so on?

IgorPartola5• 10 years ago

Not sure if they are. I remember when the Fed lowered their rates to their current level, someone theorized that it would be profitable, but I have no idea if they are actually doing this.

craigyk• 10 years ago

The Fed is nominally independent of the government. Ideally they should be working together with the government providing more stimulus and jobs to bridge an economic slump (also doing something about student loans, as you mentioned). Unfortunately government policy is driven as much by fear and ideology as by rationality, so we are mostly limited to what the Fed can do by setting interest rates.

6stringmerc3• 10 years ago

Though it carries some tinfoil hat like connotations, I'd say the Fed is almost more independent of the US government than Goldman Sachs (& Wall St. in general), which should be scary on an entirely different level.

gherkin05• 10 years ago

Seems to me that the government has a much better way to stimulate the economy: lower rates on existing student loans.

I agree about the banks, but how stimulating would lowering rates on student loads really be, though? While students overburdened by debt get a lot of press, it seems like too small of a demographic to help much. I think we'd get more bang for the buck with programs that target lower skilled and unemployed people.

jfoutz• 10 years ago

1.2 trillion [1]. rates bounce around but 5% seems fair. It's a weird world when i can't tell if 60 billion dollars is a lot or not.

One thing to keep in mind, they're young. If they save the extra money, they've got a loooong time for compound interest to work on those dollars.

[1] https://en.wikipedia.org/wiki/Student_debt#United_States

morgante11• 10 years ago

If the Fed can afford to give negative rates to the banks, shouldn't it follow that the DoE can afford to give negative rates to students?

Nope. The Fed is independent of the government and, most importantly, does not answer to Congress. So it can adopt measures to attempt to stimulate and improve the economy which Republicans would surely block if given the opportunity.

The DoE, however, is an executive agency and has its budget determined by Congress. Changing the interest rates would require an act of Congress.

the-dude• 10 years ago

Nope. The Fed is independent of the government

Well, Yellen recently said something along the lines of 'being part of the team' and Bernanke claimed something similar in his book or talks iirc ( sorry, no references atm ).

The whole independent claim is just smoke and mirrors.

dragonwriter9• 10 years ago

Seems to me that the government has a much better way to stimulate the economy

The government has many better ways to stimulate the economy through fiscal policy, but that requires action by Congress, which isn't interested.

The independent central bank, the Federal Reserve ("the Fed"), has its mandates from the government with regard to the economy, and a sharply limited set of monetary policy tools with which to pursue them.

If the Fed can afford to give negative rates to the banks, shouldn't it follow that the DoE can afford to give negative rates to students?

No, because the Fed issues the currency, and DoE doesn't. That makes what each can afford very different.

More importantly, aside from the issue of what they can afford, the Fed makes its own decisions on interest rates, DoE's decisions are made by Congress. Decisionmakers at the Fed have different priorities and preferences than those in Congress.

bradleyjg4• 10 years ago

The Fed could buy up refinanced student loan paper in a similar manner to how it's been artificially decreasing the cost of borrowing to buy real estate by accumulating almost 2 trillion dollars worth of MBS paper. That would increase the demand for refinanced student loans and drive down the rates.

batbomb• 10 years ago

Just nit picking, but the DOE is the Department of Energy. The ED or DOED is the Department of Education.

mrweasel• 10 years ago

My jaded view would be that the banks would just borrow free money

I'm not entirely sure that is how it would work. They use Denmark as an example, but I believe that the negative interest here was for deposits in "National Banken"/treasury bonds. Meaning that the banks can't just park their money with the state, at least not without incurring a lose.

Some still bought Danish treasury bonds, because at least the lose would be predictable and with no real risk.

It forces the banks to actually do something with what ever money they have, but you're right in as so fare that the customers aren't going to benefit. Most likely the money will just be placed in stock or treasury bond of other stable countries.

T-A2• 10 years ago

http://www.bloomberg.com/news/articles/2015-06-30/tax-minist...

gabriel34• 10 years ago

I believe there is a misconception on this. The interest rate is payed BY the government to the holders of the treasury security.

This is loan the government takes to pay for its expenses. The interest rate the government pays on these securities is determined by the FED, and it is one powerful weapon to regulate an economy. The government is the lowest risk debtor in a country, so anybody who wants borrow must pay more than what the government does. If the FED raises the rate, the rest of the economy follows, financing goods and investing get harder, but inflation tends to recede. The opposite happens when the rate is lowered.

If the government pays negative rates on its securities, the banks have to pay TO the government in order to keep money invested in securities. The effect is that the government's debt will decrease, money will flood the market, possibly resulting in a bit of inflation, but maybe kickstarting the economy (and your student loan rates might get lower, if they are not regulated and/or subsidized, which I'm not of sure since I don't live in the US).

ergothus• 10 years ago

As much as I'm a fan of education, I'd think we'd want to do more infrastructure funding. Spending money that we are GOING TO HAVE TO SPEND makes sense when it is "cheap" money, no?

But, as another commenter said, that'd require Congressional action, which doesn't seem to be happening anytime soon.

T-A2• 10 years ago

My jaded view would be that the banks would just borrow free money, but not pass anything onto the consumers, instead using it for more high risk trading.

Regulatory changes following the financial crisis make it harder [1] for banks to engage in proprietary trading and pose stricter limits [2] on how much risk they can take on.

[1] https://en.wikipedia.org/wiki/Volcker_Rule

[2] https://en.wikipedia.org/wiki/Basel_III

toomanybeersies• 10 years ago

It's entirely possible.

Here in New Zealand, we have interest free student loans. There are minimum repayments (as a percentage of income), and the loan is no longer interest free if you go overseas for more than 6 months of the year.

Since inflation is a given, student loans are effectively negative interest over time.

It also means that if you graduate, and can't find a high paying job, you're not crippled by interest payments (there's also a minimum income threshold).

Shivetya• 10 years ago

So bad fiscal policy and regulatory policies have us finally at the end of the road? Going negative? Since people won't spend and are so intent on saving they will force their hand or punish them so they become good little Keynesians ?

Well the only upside is that it won't encourage people to want a digital currency based system. Those little bank notes under the bed cannot be hacked, cannot be forbidden to be spent on specific goods or people, and cannot be confiscated out of bank.

So I guess this just really comes down to a case that over the top government borrowing is pulling so much money out of the markets that they need to force private investors to put money in

mrchucklepants• 10 years ago

An attack on cash will surely follow.

illvm• 10 years ago

No, but the bank notes can lose value and become worthless.

iphoneseventeen• 10 years ago

What I read from the article: Relax, it is just a stress test. We aren't going to actually do this. We would only do this in the case of an emergency. We would totally do this, but only if we have to. We have to do this.

nostromo2• 10 years ago

I wish the Fed would research sending checks to tax payers as a stimulus strategy. Because it appears the low interest rate (and QE) strategy isn't as effective as it once was - in part due to uncooperative banks.

If/when the time comes to put the breaks on the economy, the money could be removed from circulation with a slight uptick in taxes of some sort (income, gas, tariffs, whatever) -- but unlike a normal tax, we would apply it against the Fed's balance sheet and not place it in government coffers.

Milton Friedman and Ben Bernanke have called this idea helicopter money.

http://www.economist.com/blogs/buttonwood/2014/11/reviving-e...

chiph• 10 years ago

Bush did this in 2008, sending rebate checks of $600 to individuals, and $1200 to joint filers.

http://www.cnn.com/2008/POLITICS/02/13/bush.stimulus/

Results were mixed - The dollars amounts weren't really a windfall to most people, so some additional spending went on. But most people realized they would need to repay that money at tax time, and held onto it.

nostromo2• 10 years ago

The difference is the source of the funds.

I'm suggesting the Federal Reserve do this -- not the federal government. The federal government can't create money, so the stimulus effect is lessened.

dragonwriter9• 10 years ago

I wish the Fed would research sending checks to tax payers as a stimulus strategy.

That's a fiscal (not monetary) stimulus strategy, outside of the Fed's purview but something Congress can do: its been done (the most direct example being the one-time tax rebates in the Economic Stimulus Act of 2008.)

Because it appears the low interest rate (and QE) strategy isn't as effective as it once was - in part due to uncooperative banks.

Monetary stimulus has always been a limited tool useful for smoothing things out, with most major effects requiring fiscal stimulus. The Feds job is to manage the money supply, with certain economic goals in mind. Broader efforts to manage the economy are reserved to Congress.

I'm not sure expecting more of the Fed is the right response to Congress not taking effective action on stimulus.

static_noise3• 10 years ago

The way I understand it, the banks do not simply get money from the Fed. Combined with negative interest rates that would be "money for free".

It is similar to how you a credit from a bank when you buy a house. Yes, the bank gives you money but you give (the rights to) the house to the bank until you fully paid your credit back.

The banks then goes to the Fed and says: "Here, thake this house as security and print me some real money."

The Fed says: "Great house you have there; here is the money and here is some more."

In the end this leads to the creation of things that are accepted by the Fed as securities, for example houses. With negative interest rates, the Fed basically pays for the creation of such securities.

gherkin05• 10 years ago

The way I understand it, the banks do not simply get money from the Fed. Combined with negative interest rates that would be "money for free".

I don't understand this. Under a negative interest rate scenario, wouldn't the banks be paying the Fed for the privileged of keeping their money there? Where is the "free money" coming from?

static_noise3• 10 years ago

OK, we have a misunderstanding here.

I was talking about the scenario where the Fed gives out a credit in exchange for securities. This usually is accompanied with postive interest rates such that the banks have to pay back more.

Are you talking about the scenario where the banks deposit money to the Fed?

clarkmoody• 10 years ago

For a good read on why this Keynesian push toward consumption is misguided, check out this 2005 article[1]. The counterargument against consumption as the driver of the economy states that saving and investment actually leads to growth. The thesis of the linked article is that a huge amount of business investment is hidden from GDP numbers since it falls under "net investment," with two very large sums (business income & business investment) netting out to a small number. When we ignore the huge amount of business investment and focus only on the net, we miss its importance.

Negative interest rates are simply the latest contortion of the Keynesians that will fail to produce the desired results yet again.

[1] https://mises.org/library/standing-keynesian-gdp-its-head-sa...

bubbleRefuge3• 10 years ago

Negative interest rates and interest rate policy in general is a Monetarist not Keynesian policy remedy.

jerf3• 10 years ago

I know I'm just a lowly programmer and engineer who shouldn't opine about economics very much, but I observe simply this: The "stimulus" didn't work. I find arguments about how it wasn't big enough to be null, because it isn't clear that we could have afforded much more and if the only way this stimulus works is to spend more than is possible, that is just a way of saying "it doesn't work" that saves some face but doesn't change anything about the practicality.

It's been 8 years now we've been on this policy. Nobody 8 years ago would have predicted what happened. From a scientific perspective, what you do with theories that fail to correctly predict future occurrences is simple.

But our elites really like what quasi-Keynesianism tells them, so the rest of us can continue to live impoverished lives for their benefit.

tdb7893• 10 years ago

Why do you say the stimulus didn't work?

nabla9• 10 years ago

Stimulus worked.

What Debate? Economists Agree the Stimulus Lifted the Economy http://www.nytimes.com/2014/07/30/upshot/what-debate-economi...

Once again: Yes, the stimulus worked. http://www.latimes.com/business/hiltzik/la-fi-mh-stimulus-wo...

"Internet economics" and the discussion is full of fringe theories that refer to mises.org. For them every mainstream economist is Keynesian. Even if they belong to Chicago school.

MCRed• 10 years ago

The reason the "stimulus" didn't work is that it costs more to the economy to produce the money that was spent to "stimulate" it than the economic benefits of that spending could produce.

And yes, 8 years ago people did predict what happened, exactly, namely look at the archives of http://mises.org and you will find articles predicting this result.

The problem is, it doesn't fit the political desires.

If you really want to stimulate the economy, by getting more money being spent, simply cut taxes and cut inflation. (Which means cutting government spending). You cut monetary inflation and taxation and individuals and businesses will have more money at the end of the day to spend on things.

Unfortunately, cutting government spending doesn't fit the "lets promise people free health care and education to get elected" agenda.

The Bush "stimulus" didn't work either. We had a housing bubble, but that wasn't exactly a net positive for the economy.

The problems is the "Science" of economics has been compromised to the point where people aren't even aware of the predictions that this would fail (you weren't for instance).... because what passes for economics is more akin to rationalizations for political policies, rather than a science. (outside of places like the Chicago and Austrian schools.)

dragonwriter9• 10 years ago

I know I'm just a lowly programmer and engineer who shouldn't opine about economics very much, but I observe simply this: The "stimulus" didn't work.

That's not an observation, that's a conclusion that requires a prior conclusion on a hypothetical that requires substantial economic analysis to have any credibility on: to wit, what the economy would have done without the stimulus.

My read is that the monetary stimulus by the Fed did exactly the prevention of imminent disaster that it was supposed to do. It didn't do the kind of improvements that take fiscal policy to do -- because it wasn't fiscal policy -- which isn't a difference of degree of magnitude, but kind.

I find arguments about how it wasn't big enough to be null, because it isn't clear that we could have afforded much more

The only arguments I've seen about insufficient quantity of stimulus have been about the government (not Fed) fiscal stimulus of 2009 (ARRA and related bills). Given the low price of government borrowing, its quite obvious that we could have spent a lot more in (and since) 2009 on fiscal stimulus; the reason we didn't is political, not available-resources driven.

But that's a whole different thing than the Feds monetary stimulus.

It's been 8 years now we've been on this policy.

What policy, exactly? Most of the Feds particularly intense monetary stimulus finished several years ago and has been in winding-down/settlement for the last few years, ditto with fiscal stimulus under ARRA. And 8 years ago (early 2008) was before the crisis and stimulus responses; if you are talking about the stimulus -- both monetary and fiscal -- adopted in response to the 2008/9 crisis, it started less than 8 years ago, and the intense policy ended several years ago, so in no sense have we been on a common stimulus policy for eight years.

Nobody 8 years ago would have predicted what happened.

Both Austrians and Keynesians (among others) predicted that the actual stimulus that was engaged in by the Fed and government would fail to achieve what people wanted from stimulus (for, naturally, radically different reasons). To say that no one predicted the failure of the stimulus that was adopted is, simply, incorrect.

morgante11• 10 years ago

The "stimulus" didn't work.

That's pretty far from being a simple observational fact. I'd say the stimulus did work pretty much exactly as well as most economists expected.

Evidence:

* Unemployment rate: http://data.bls.gov/timeseries/LNS14000000

* GDP: https://research.stlouisfed.org/fred2/graph/?g=3kv2

* Household income: https://research.stlouisfed.org/fred2/graph/?g=3kv6

The stimulus did exactly what it was supposed to do: prevent a prolonged recession and return the economy to growth.

Nobody 8 years ago would have predicted what happened.

If you had taken a poll of Keynesian economists on the likely impact of the policies (a modest fiscal stimulus together with expansionary monetary policy), I'm pretty sure most of them would have predicted exactly what we got: a mild recovery coupled with strong asset growth.

This idiotic notion that stimulus didn't work is a myth promoted by Republicans. If the stimulus didn't work, we'd have suffered through a long recession and would have high unemployment to this day. You don't even have to look far to find evidence of this: European countries forced into austerity have had precisely the kind of anemic economic and labor market growth that Keynesian economics predicted.

roymurdock• 10 years ago

New York Fed President William Dudley said last month that policy makers were "not thinking at all seriously of moving to negative interest rates.
"But I suppose if the economy were to unexpectedly weaken dramatically, and we decided that we needed to use a full array of monetary policy tools to provide stimulus, it’s something that we would contemplate as a potential action," he said on Jan. 15.

The Fed continues to fritter away whatever credibility it has left by waffling back and forth on interest rates.

It raised interest rates and committed to 2.0% core inflation by 2018 just two months ago. By including this long-term negative interest rate scenario in its 2016 stress tests, it is basically admitting that there is some non-negligible probability that it will be unable to follow through on this commitment, and that banks should be prepared to weather the storm if and when it completely loses control of its grip over the direction of the short term interest rate.

The article does not actually speculate on what might happen if the Fed were to reverse its rate hike and instead lower the FFR into negative territory. I'd imagine that basically nothing would change, and that the banks would simply take a 0.25% haircut on their holdings of 3-month treasury bonds as they have been doing in Europe for the past 1.5 years. They will not pass this negative interest rate onto regular customers as this would either (a) drive them to another bank which would benefit from the new deposits or (b) force consumers to withdraw deposits and hold cash instead. Banks need these deposits to loan against, and a 0.25% "holding tax" on a relatively small portion of their holdings would not justify the loss in deposits. Banks will just eat the hit to their profit margins and life will go on as normal in the supply side of money world.

6stringmerc3• 10 years ago

Skimmed the article, did a Ctrl+F, didn't see mention of essentially channeling free money into depressed bond interest rates leading to even more aggressive corporate stock buybacks which predominately benefit the top 1% investor class in the United States, without any discrenable benefit to wage-level workers or the drastic income inequality, was not surprised.

AndrewBissell• 10 years ago

Central banks exist to cram more credit into an economy than it would otherwise support. If the people refuse to borrow & spend, they'll just take the money right out of their bank accounts.

Even hinting at this level of meddlesome social engineering by the managers of our currency ought to elicit reactions of disgust and outrage.

bubbleRefuge3• 10 years ago

This is hugely disappointing. Its been 8 years since the economic crash and the Fed has been trying to inflate this economy using monetary policy and we have yet to eclipse 3% real GDP growth for a whole year. They FED has been trying to create inflation and they have failed. Where is the critical thinking at the policy making/ decision making level ? At some point we have to reach the obvious conclusion that current economic policy models are broken, don't work, and we need new leadership and a fresh approach.

Obama is largely to blame for this. He chose to listen to establishment/wall street economic advisers rather than more progressive ( say Keynesian) thinkers. This is why you are seeing Bernie/Elizabeth Warren gaining in popularity. Quite sadly, the Gap between the middle class and extremely wealthy in this country have never increased more so than under Obama, a Democrat.

dnautics3• 10 years ago

http://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hig...

"When you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis."

Shorter Krugman: Cheat poor people out of their wages to make the government look like it's doing something about unemployment.

bubbleRefuge3• 10 years ago

How about increase demand for labor via increasing overall aggregate demand via stronger fiscal policy ( lower taxes or high spending depending on your polics)

Keynesians criticizing Krugmeister. http://stephaniekelton.libsyn.com/randy-wray-on-krugman-and-...

jgalt2123• 10 years ago

WTF!. Why doesn't the Fed just send money to consumers? You can't budge CPI by making Ray Dalio and Jamie Dimon richer (which is the main effect of ZIRP). There's only so much eggs and butter they can consume.

dragonwriter9• 10 years ago

Why doesn't the Fed just send money to consumers?

Because the Fed isn't the government, just a quasi-independent agency within the government with limited scope of operations, and "just send money to consumers" isn't within that scope.

If you think the government ought to do this, then that should probably inform your votes for Congress and the President, this being an election year and those being the actors that would need to be involved in that.

jgalt2123• 10 years ago

I guess so, but 2008 the Fed has done a number of things it doesn't clearly have the legal mandate to do so.

jgalt2123• 10 years ago

Actually, according this New Yorker article the Fed can just print money and distribute it to the populace. It's call "money finance" and has been used in the US before.

http://www.newyorker.com/magazine/2015/11/23/printing-money-...

staffanj• 10 years ago

Rates will never be negative when banks lend FROM the fed.

Interest rates could become negative when the banks lend TO the fed (IE parking the money overnight).

s_q_b• 10 years ago

This is a classic failure of aggregate demand, and it cannot be fixed with monetary policy alone. I'm struck by the continued relevance of the lessons of the Great Depression.

For example, see these lines from FDR's First Inaugural Address:

Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply.

Primarily this is because the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.

True they have tried, but their efforts have been cast in the pattern of an outworn tradition.

>Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence.

They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.

arca_vorago• 10 years ago

Congress should have never given up it's constitutional power to control monetary policy, the Federal Reserve (which is neither) should be audited and the backlash from the revelations should be used to push a revocation of the Federal Reserve Act which was passed under dubious circumstances by shady men connected to the European banking oligarchy, along with various other bad legislation pushed through by the same groups (that also pushed us into the world wars.)

I've said it before, and I'll say it again. Bankers are more the enemy of the people than terrorists, and just because Dimon and Blankfein need an extra 300mil bonus doesn't mean we should allow them to gut our economy. Unlike some of the placating bullshit I've seen people posting in this thread, the 07-08 crash was because of abuse, fraud, and lack of oversight, and we need to start sending the top people to jail. If not, then we are just going to have another recession, and another, and maybe a depression.

Adjusted for inflation rates are basically negative already anyway! Negative rates punish the middle class, the workers, the pensioners, and retirees, while funneling even more money to the already grotesquely wealthy uber-elite.

Johnie2• 10 years ago

First of all, there's a misconception on this discussion here. The Fed is PAYING banks the Fed Fund Rate (currently sitting at 0.5%) for parking their excess reserves with the Federal Reserve overnight. So a negative interest rate means that the banks have to pay the Fed money to hold their money. You can think of this as if your bank charges you to hold your money for you.

Why would the Fed want to do this?

Banks make money by lending out deposits and charging a higher interest rate than what they pay out. To support their lending operations, banks need to hold a percentage of the asset as reserves. In recent years, banks have been holding $2.3T [1][2] more than the minimum reserve that is required. This means that the banks are sitting on the deposit and not lending it out. The excess reserve are then deposit with the Federal Reserve earning 0.5% interest. What the Fed wants to do is encourage banks to lend out the money rather than sit on it so that it stimulates the economy. (More lending->increase asset prices->people feel richers->people buy more stuff->companies hire more people->stimulates economy)

Why aren't banks lending?

There are a number of reasons why banks are not lending as much as they used to. After 2008, banks have become much more risk adverse. In addition, regulations have forced tighter lending standards on the banks reducing the amount of loans issued[3]. In addition, Dodd-Frank credit risk retention regulation now forces banks to have "skin in the game" when they issue and securitize loans and mortgages [4]. Because of this and the collapse of 2008 is still fresh in the bank's minds, they have increased lending standards and reduced their risk profile.

So, the result is that they sit a huge pile of excess reserves that they can't lend out.

In normal environments, the market resolves this problem itself. Banks that are lending will offer higher rates to attract deposits from the banks that are not lending and offering lower rates.

However, in recent decades, there's been a major consolidation of banks. Between 1990-present, 37 regional banks have combined into or acquired by the 4 large banks (Citi, JPMorgan Chase, BoA, Wells Fargo)[5]. These top 4 banks alone hold 6.46T of the $10.6T in consumer deposits. These four banks have pay an interest rate of 0.01%. The national average interest rate is 0.06%.

On the other hand, commercial lending banks, like CIT, Sallie Mae, and Synchrony, are trying to attract deposits paying over 15x the national average interest rate. These traditionally lending banks have had to set up high yield online banking operations to attract deposits to support their lending operations.

The issue is that most consumers don't shop around for high yield accounts. Many don't realize that there is such a drastic difference between the high yield accounts and their local banks.

This leads to a significant amount of assets being locked up at the large banks that aren't lending. Lenders, like Sallie Mae, end up paying higher rates on deposits and need to charge higher rates for their student loans.

What happens to consumer deposits when Fed Fund Rate goes negative?

For the past couple of years, these large banks have been trying to shed excess deposits. They have lowered their interest rate to practically 0%. The large banks have even charged large institutional depositors to hold their money [7]. If the Fed Fun Rates go negative, banks will try to charge greater fees for banking services and/or encourage consumers to move their funds to other banks. The difficulty here is that the banks want to maintain the relationship with the consumer to generate future revenue while not holding the deposits.

This misallocation and inefficiency in the deposit marketplace is what we are trying to solve with smart technology.

[1] http://www.federalreserve.gov/releases/h3/current/

[2] https://research.stlouisfed.org/fred2/series/EXCSRESNS

[3] http://www.urban.org/research/publication/impact-tight-credi...

[4] https://corpgov.law.harvard.edu/2014/11/16/a-closer-look-at-...

[5]http://www.upworthy.com/how-37-banks-became-4-in-just-a-few-...

[6] http://www.federalreserve.gov/releases/lbr/current/

[7] http://www.wsj.com/articles/big-banks-to-americas-companies-...

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