11 ms·

The Fed Wants to Test How Banks Would Handle Negative Rates

85 points by irln 11y ago

pc86 11y 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 11y 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)
  - marcosdumay 11y ago
    More like: -0.3% Bank account 0% Mattress [-100%..0%] Investments No government goes into negative rates when the times are good.
- mayukh 11y 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 11y 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 11y 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 11y 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 11y 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 11y ago
    I wonder what it would do to commodity prices?
    - ihsw 11y ago
      Commodity prices have already crashed through the floor, seeing them crash further may actually start freaking people out. Frankly I think we need to stimulate the demand side of things -- give people free money, and don't let the banks screw it up like the subprime mortgage crisis.
      - dragonwriter 11y ago
        > Frankly I think we need to stimulate the demand side of things That's a fiscal policy choice that would take action by Congress, and doesn't seem likely with the Congress we have. OTOH, if people get to care enough about it, well, it is an election year, so in principal that could change.
  - morgante 11y 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.
- bradleyjg 11y 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.
  - SCAQTony 11y 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.
    - bradleyjg 11y ago
      If the rates go negative enough banks will set up cash management tools where money is held as cash rather than on deposit at the bank (i.e. banks won't be able to lend against it). The existing interbank system couldn't be used for that though, so a parallel reconciliation, netting, and transfer system would have to be set up and dealing with physical cash is fairly expensive (don't forget insurance). I wouldn't expect it unless rates go below -1% and maybe even further.
- JoshTriplett 11y 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 11y 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.
    - DamnYuppie 11y ago
      I am reading much of your premise to be related to checking accounts (check writing and automated bill pay). Most people don't carry a large balance there so a negative interest rate on those accounts will not really have a large impact. Yet on savings accounts, or those accounts whose intent it is to be liquid yet remain relatively unused, could be impacted by this. Which at that point, again under your premise of robbery, a person is essentially wagering whether they would rather be guaranteed to be fleeced incrementally, or run the possibly of someday being taken for all of their savings. At that point I think you would see many people start to withdraw large amounts of savings, whether to be stored underneath a mattress or into bonds or some other investment, while still keeping an active checking account.
      - kstenerud 11y ago
        Since most people don't do this already despite losing money to inflation, I doubt there will be a significant change in behavior for most people when interest rates tip negative.
- dragonwriter 11y 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.
- SCAQTony 11y 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.
  - pc86 11y ago
    Storing cash is a safe deposit box is illegal in the United States. Edit: maybe
    - toomuchtodo 11y ago
      Do you have citation? Genuinely curious about this.
      - pc86 11y ago
        This is one of those things where is not a law that says "you may not keep cash in a SD box," however there are several laws and regulations that make it sub-optimal or difficult to disprove an allegation that you broke some other law. 1. No FDIC insurance (no legal impact obviously but flooding is not unheard of) 2. If you have a large amount of cash with no traceable origin, the IRS is definitely going to want to know how you came about it. Concealing the source of cash violates federal regulations. 3. I've heard many times that directly taking cash out of circulation is itself a crime, and that courts have interpreted SD boxes as such, however the only actual source I can find says that physically destroying cash (e.g. burning it) is a crime. I have edited my post to reflect the fact that I'm actually not 100% sure now :)
        deleted 11y ago
        [deleted]
      - SCAQTony 11y ago
        That comment worried me: I found this reference from BankRate saying putting cash in a safety deposit box is only illegal if it is concealed for tax evasion purposes. http://www.bankrate.com/brm/news/bank/20011023a.asp http://www.bankrate.com/brm/news/bank/20011023a.asp
- morgante 11y 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.
SilasX 11y 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".
- dragontamer 11y 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.
  - SilasX 11y 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".
    - dragontamer 11y ago
      Yes. Which is why this is a stress test. Will the banks survive a financial crisis if the entire world switched over to negative rates? Well, the Fed wants to know, which is why they're running this doomsday test scenario. The Fed currently expects to raise rates about 2 or 3 more times this year btw... so the scenario probably won't happen, but that doesn't change the fact that lead bankers are preparing for the worst. In other words, the article is simply stating the following fact: big banks in America are thinking about various financial doomsday scenarios. I don't think that's a bad thing at all.
      - 11y ago
lr 11y 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.
- pc86 11y 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.
  - IgorPartola 11y 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-checking-account.go https://www.bankofamerica.com/deposits/checking/personal-che...
    - morgante 11y ago
      I think the vast majority of people still have "free checking."
    - protomyth 11y ago
      Not all credit unions are immune to stupid fees. The "low aggregate balance fee" is alive and well locally. People wonder why Walmart is gaining popularity.
    - ultramancool 11y ago
      You can find free chequing accounts though and if you're careful enough to not get caught by overdraft fees, they're the way to go. I'm Canadian and I know 2 banks here that do it, but I'd imagine similar exists in the US?
IgorPartola 11y 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?
- wdewind 11y 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.
  - IgorPartola 11y 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.
    - wdewind 11y ago
      Point a) is actually heavily contended. Fraud is not estimated by any credible economist to have had a major (>5%) impact on the financial crisis. In a market situation there is always a disagreement about whether or not a security is worth what it is worth, hence the sale taking place (both sides think they are getting a good deal). There was disagreement about AAA securities of course, but it's very unclear if that is due to market valuing stuff differently or outright fraud. The contents of the loans were not lied about, whether or not they were AAA was not lied about, whether or not they should've been AAA is up for contention. I don't see your point with b) at all. If you're a bank it's not like there are a ton of avenues for you to invest your money, and outside of mortgages there aren't a lot of ways to pass the money onto consumers. So if what you want is the bank to pass its new found money onto consumers that's the avenue you want. Unfortunately the last time we did that a lot of unqualified people got loans. So my point is it's tricky.
Shivetya 11y 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 11y ago
  An attack on cash will surely follow.
- illvm 11y ago
  No, but the bank notes can lose value and become worthless.
iphoneseventeen 11y 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.
nostromo 11y 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-economy http://www.economist.com/blogs/buttonwood/2014/11/reviving-e...
- chiph 11y 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/ 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.
  - nostromo 11y 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.
- dragonwriter 11y 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_noise 11y 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.
- gherkin0 11y 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_noise 11y 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?
    - gherkin0 11y ago
      > Are you talking about the scenario where the banks deposit money to the Fed? Yes, I thought that was what negative interest rates refer to. > I was talking about the scenario where the Fed gives out a credit in exchange for securities. Are you describing quantitative easing? Because my understanding that was just the Fed buying securities (usually government ones) on the open market at market prices like any other buyer. I think the big difference in the negative interest rate scenario is the selling bank would have less incentive to then take the cash and park it in the Fed afterward. If it's a straight bailout, my guess is the Fed would be in a strong position to set the terms so it wouldn't have to pay the bank to take the money.
clarkmoody 11y 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-saving-not-consumption-main-source-spending https://mises.org/library/standing-keynesian-gdp-its-head-sa...
- bubbleRefuge 11y ago
  Negative interest rates and interest rate policy in general is a Monetarist not Keynesian policy remedy.
- jerf 11y 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 11y ago
    Why do you say the stimulus didn't work?
  - nabla9 11y ago
roymurdock 11y 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.
6stringmerc 11y 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 11y 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.
bubbleRefuge 11y 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.
- dnautics 11y ago
  http://krugman.blogs.nytimes.com/2010/02/13/the-case-for-higher-inflation/ 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.
  - bubbleRefuge 11y 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-the-frustration-of-the-heterodox?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+StephanieKeltonPodcasts+%28Stephanie+Kelton+%C2%BB+Podcasts%29 http://stephaniekelton.libsyn.com/randy-wray-on-krugman-and-...
staffanj 11y 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).
jgalt212 11y 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.
- dragonwriter 11y 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.
  - jgalt212 11y 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.
    - dragonwriter 11y ago
      There is at least one word (most likely "since" before "2008"), as well as examples and argument on the lack of legal mandate, missing from your argument.
  - jgalt212 11y 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-books-john-cassidy http://www.newyorker.com/magazine/2015/11/23/printing-money-...
s_q_b 11y 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 11y 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.
Johnie 11y 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/ http://www.federalreserve.gov/releases/h3/current/ [2] https://research.stlouisfed.org/fred2/series/EXCSRESNS https://research.stlouisfed.org/fred2/series/EXCSRESNS [3] http://www.urban.org/research/publication/impact-tight-credit-standards-2009-13-lending http://www.urban.org/research/publication/impact-tight-credi... [4] https://corpgov.law.harvard.edu/2014/11/16/a-closer-look-at-us-credit-risk-retention-rules/ 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-decades-all-in-one-astonishing-chart http://www.upworthy.com/how-37-banks-became-4-in-just-a-few-... [6] http://www.federalreserve.gov/releases/lbr/current/ http://www.federalreserve.gov/releases/lbr/current/ [7] http://www.wsj.com/articles/big-banks-to-americas-companies-we-dont-want-your-cash-1445161083 http://www.wsj.com/articles/big-banks-to-americas-companies-...

85 points by irln 11y ago

pc86 11y 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 11y 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)
- marcosdumay 11y ago
  More like: -0.3% Bank account 0% Mattress [-100%..0%] Investments No government goes into negative rates when the times are good.
mayukh 11y 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 11y 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 11y 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 11y 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 11y 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 11y ago
  I wonder what it would do to commodity prices?
  - ihsw 11y ago
    Commodity prices have already crashed through the floor, seeing them crash further may actually start freaking people out. Frankly I think we need to stimulate the demand side of things -- give people free money, and don't let the banks screw it up like the subprime mortgage crisis.
    - dragonwriter 11y ago
      > Frankly I think we need to stimulate the demand side of things That's a fiscal policy choice that would take action by Congress, and doesn't seem likely with the Congress we have. OTOH, if people get to care enough about it, well, it is an election year, so in principal that could change.
- morgante 11y 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.
bradleyjg 11y 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.
- SCAQTony 11y 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.
  - bradleyjg 11y ago
    If the rates go negative enough banks will set up cash management tools where money is held as cash rather than on deposit at the bank (i.e. banks won't be able to lend against it). The existing interbank system couldn't be used for that though, so a parallel reconciliation, netting, and transfer system would have to be set up and dealing with physical cash is fairly expensive (don't forget insurance). I wouldn't expect it unless rates go below -1% and maybe even further.
JoshTriplett 11y 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 11y 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.
  - DamnYuppie 11y ago
    I am reading much of your premise to be related to checking accounts (check writing and automated bill pay). Most people don't carry a large balance there so a negative interest rate on those accounts will not really have a large impact. Yet on savings accounts, or those accounts whose intent it is to be liquid yet remain relatively unused, could be impacted by this. Which at that point, again under your premise of robbery, a person is essentially wagering whether they would rather be guaranteed to be fleeced incrementally, or run the possibly of someday being taken for all of their savings. At that point I think you would see many people start to withdraw large amounts of savings, whether to be stored underneath a mattress or into bonds or some other investment, while still keeping an active checking account.
    - kstenerud 11y ago
      Since most people don't do this already despite losing money to inflation, I doubt there will be a significant change in behavior for most people when interest rates tip negative.
dragonwriter 11y 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.
SCAQTony 11y 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.
- pc86 11y ago
  Storing cash is a safe deposit box is illegal in the United States. Edit: maybe
  - toomuchtodo 11y ago
    Do you have citation? Genuinely curious about this.
    - pc86 11y ago
      This is one of those things where is not a law that says "you may not keep cash in a SD box," however there are several laws and regulations that make it sub-optimal or difficult to disprove an allegation that you broke some other law. 1. No FDIC insurance (no legal impact obviously but flooding is not unheard of) 2. If you have a large amount of cash with no traceable origin, the IRS is definitely going to want to know how you came about it. Concealing the source of cash violates federal regulations. 3. I've heard many times that directly taking cash out of circulation is itself a crime, and that courts have interpreted SD boxes as such, however the only actual source I can find says that physically destroying cash (e.g. burning it) is a crime. I have edited my post to reflect the fact that I'm actually not 100% sure now :)
      - deleted 11y ago
        [deleted]
    - SCAQTony 11y ago
      That comment worried me: I found this reference from BankRate saying putting cash in a safety deposit box is only illegal if it is concealed for tax evasion purposes. http://www.bankrate.com/brm/news/bank/20011023a.asp http://www.bankrate.com/brm/news/bank/20011023a.asp
morgante 11y 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.

SilasX 11y 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".

dragontamer 11y 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.
- SilasX 11y 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".
  - dragontamer 11y ago
    Yes. Which is why this is a stress test. Will the banks survive a financial crisis if the entire world switched over to negative rates? Well, the Fed wants to know, which is why they're running this doomsday test scenario. The Fed currently expects to raise rates about 2 or 3 more times this year btw... so the scenario probably won't happen, but that doesn't change the fact that lead bankers are preparing for the worst. In other words, the article is simply stating the following fact: big banks in America are thinking about various financial doomsday scenarios. I don't think that's a bad thing at all.
    - 11y ago

lr 11y 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.

pc86 11y 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.
- IgorPartola 11y 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-checking-account.go https://www.bankofamerica.com/deposits/checking/personal-che...
  - morgante 11y ago
    I think the vast majority of people still have "free checking."
  - protomyth 11y ago
    Not all credit unions are immune to stupid fees. The "low aggregate balance fee" is alive and well locally. People wonder why Walmart is gaining popularity.
  - ultramancool 11y ago
    You can find free chequing accounts though and if you're careful enough to not get caught by overdraft fees, they're the way to go. I'm Canadian and I know 2 banks here that do it, but I'd imagine similar exists in the US?

IgorPartola 11y 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?

wdewind 11y 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.
- IgorPartola 11y 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.
  - wdewind 11y ago
    Point a) is actually heavily contended. Fraud is not estimated by any credible economist to have had a major (>5%) impact on the financial crisis. In a market situation there is always a disagreement about whether or not a security is worth what it is worth, hence the sale taking place (both sides think they are getting a good deal). There was disagreement about AAA securities of course, but it's very unclear if that is due to market valuing stuff differently or outright fraud. The contents of the loans were not lied about, whether or not they were AAA was not lied about, whether or not they should've been AAA is up for contention. I don't see your point with b) at all. If you're a bank it's not like there are a ton of avenues for you to invest your money, and outside of mortgages there aren't a lot of ways to pass the money onto consumers. So if what you want is the bank to pass its new found money onto consumers that's the avenue you want. Unfortunately the last time we did that a lot of unqualified people got loans. So my point is it's tricky.

Shivetya 11y 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 11y ago
An attack on cash will surely follow.
illvm 11y ago
No, but the bank notes can lose value and become worthless.

iphoneseventeen 11y 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.

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

chiph 11y 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/ 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.
- nostromo 11y 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.
dragonwriter 11y 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_noise 11y 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.

gherkin0 11y 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_noise 11y 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?
  - gherkin0 11y ago
    > Are you talking about the scenario where the banks deposit money to the Fed? Yes, I thought that was what negative interest rates refer to. > I was talking about the scenario where the Fed gives out a credit in exchange for securities. Are you describing quantitative easing? Because my understanding that was just the Fed buying securities (usually government ones) on the open market at market prices like any other buyer. I think the big difference in the negative interest rate scenario is the selling bank would have less incentive to then take the cash and park it in the Fed afterward. If it's a straight bailout, my guess is the Fed would be in a strong position to set the terms so it wouldn't have to pay the bank to take the money.

clarkmoody 11y 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-saving-not-consumption-main-source-spending https://mises.org/library/standing-keynesian-gdp-its-head-sa...

bubbleRefuge 11y ago
Negative interest rates and interest rate policy in general is a Monetarist not Keynesian policy remedy.
jerf 11y 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 11y ago
  Why do you say the stimulus didn't work?
- nabla9 11y ago

roymurdock 11y 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.

6stringmerc 11y 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 11y 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.

bubbleRefuge 11y 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.

dnautics 11y ago
http://krugman.blogs.nytimes.com/2010/02/13/the-case-for-higher-inflation/ 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.
- bubbleRefuge 11y 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-the-frustration-of-the-heterodox?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+StephanieKeltonPodcasts+%28Stephanie+Kelton+%C2%BB+Podcasts%29 http://stephaniekelton.libsyn.com/randy-wray-on-krugman-and-...

staffanj 11y 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).

jgalt212 11y 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.

dragonwriter 11y 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.
- jgalt212 11y 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.
  - dragonwriter 11y ago
    There is at least one word (most likely "since" before "2008"), as well as examples and argument on the lack of legal mandate, missing from your argument.
- jgalt212 11y 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-books-john-cassidy http://www.newyorker.com/magazine/2015/11/23/printing-money-...

s_q_b 11y 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 11y 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.

Johnie 11y 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/ http://www.federalreserve.gov/releases/h3/current/ [2] https://research.stlouisfed.org/fred2/series/EXCSRESNS https://research.stlouisfed.org/fred2/series/EXCSRESNS [3] http://www.urban.org/research/publication/impact-tight-credit-standards-2009-13-lending http://www.urban.org/research/publication/impact-tight-credi... [4] https://corpgov.law.harvard.edu/2014/11/16/a-closer-look-at-us-credit-risk-retention-rules/ 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-decades-all-in-one-astonishing-chart http://www.upworthy.com/how-37-banks-became-4-in-just-a-few-... [6] http://www.federalreserve.gov/releases/lbr/current/ http://www.federalreserve.gov/releases/lbr/current/ [7] http://www.wsj.com/articles/big-banks-to-americas-companies-we-dont-want-your-cash-1445161083 http://www.wsj.com/articles/big-banks-to-americas-companies-...