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Has anyone looked into his argument that zero percent interest rates destroy business models that underpin our economy (I.e. insurance)?

jbarham 10y ago
The entire finance industry has been saying this is a systemic risk since ZIRP was instituted in 2008 if the economy didn't achieve "takeoff velocity". Here we are eight years later still under ZIRP and even NIRP (which is completely unprecedented) so the systemic risk is only bigger.
mathattack 10y ago
Low interest rates (at least with a yield curve) can help banks. Banks that can borrow short term and pay near zero, and lend long term (say a mortgage) with a higher rate can make money in this environment. Insurance and Pensions are trickier, and it gets to the point of real (inflation adjusted) versus nominal returns. If an insurance company needs to invest against a real returns, than a 3% interest rate with 0% inflation is the same as 7% with 4% inflation. This is how we should think of our 401Ks - as long as we maintain purchasing power, the # of the rate doesn't matter. (Rates rise when inflation rises and goes down when it shrinks) The flip side is if insurance companies or pensions make nominal promises ("Give us 10% of your income per year, and we'll invest it guaranteed at a 5% return") then it becomes problematic. But in a low rate environment, people shouldn't be making these kinds of promises. The strange thing about this whole article is why now? Why are the financial markets more of a casino than in 1999 or 2007?
- forgetsusername 10y ago
  If banks make money off the interest rate spread, how does the absolute level of rates matter (outside of misjudged future rising rates)?
  - TheSpiceIsLife 10y ago
    I think it goes something like this: Low interest rates cause debt inflation. People can borrow increasingly more as rates go down. As rates go down, the spread doesn't change, but the value of the loans increases. Maybe someone more knowledgeable can fix me up here.
  - mathattack 10y ago
    They don't. And they borrow from each other at "Libor Plus" which is a variable rate. (Libor is variable)
deleted 10y ago
[deleted]
throwaway5777 10y ago
To answer your question. Yes. Thousands of people are looking into this all day every day. From economists in academia to CIO's at every major bank to the motley crew of econ-conspiracy-theory bloggers. Like many things in economics, data to study this is limited and noisy and just sucks. Lot of assumptions needed in the models and there is no historical precedent to bounce on. TL;DR There is no consensus whether zero percent interest rates will turn out to be overall good, bad or neutral for the economy. To the extent there may be winners and losers, even details of that are still unclear. Any other answers right now are just speculating opinions. My opinion at this point: I agree that ZIRP/NIRP do not work under the current business models that underpin our entire economy! (try it for yourself put a zero in a denominator of a fraction)... But I disagree this necessarily destroys the business models, maybe it does turn out very bad or maybe business models just change/fix the error as they were written poorly to begin with and things will be OK. Who knows.

jbarham 10y ago

The entire finance industry has been saying this is a systemic risk since ZIRP was instituted in 2008 if the economy didn't achieve "takeoff velocity". Here we are eight years later still under ZIRP and even NIRP (which is completely unprecedented) so the systemic risk is only bigger.

mathattack 10y ago

Low interest rates (at least with a yield curve) can help banks. Banks that can borrow short term and pay near zero, and lend long term (say a mortgage) with a higher rate can make money in this environment. Insurance and Pensions are trickier, and it gets to the point of real (inflation adjusted) versus nominal returns. If an insurance company needs to invest against a real returns, than a 3% interest rate with 0% inflation is the same as 7% with 4% inflation. This is how we should think of our 401Ks - as long as we maintain purchasing power, the # of the rate doesn't matter. (Rates rise when inflation rises and goes down when it shrinks) The flip side is if insurance companies or pensions make nominal promises ("Give us 10% of your income per year, and we'll invest it guaranteed at a 5% return") then it becomes problematic. But in a low rate environment, people shouldn't be making these kinds of promises. The strange thing about this whole article is why now? Why are the financial markets more of a casino than in 1999 or 2007?

forgetsusername 10y ago
If banks make money off the interest rate spread, how does the absolute level of rates matter (outside of misjudged future rising rates)?
- TheSpiceIsLife 10y ago
  I think it goes something like this: Low interest rates cause debt inflation. People can borrow increasingly more as rates go down. As rates go down, the spread doesn't change, but the value of the loans increases. Maybe someone more knowledgeable can fix me up here.
- mathattack 10y ago
  They don't. And they borrow from each other at "Libor Plus" which is a variable rate. (Libor is variable)

deleted 10y ago

[deleted]

throwaway5777 10y ago

To answer your question. Yes. Thousands of people are looking into this all day every day. From economists in academia to CIO's at every major bank to the motley crew of econ-conspiracy-theory bloggers. Like many things in economics, data to study this is limited and noisy and just sucks. Lot of assumptions needed in the models and there is no historical precedent to bounce on. TL;DR There is no consensus whether zero percent interest rates will turn out to be overall good, bad or neutral for the economy. To the extent there may be winners and losers, even details of that are still unclear. Any other answers right now are just speculating opinions. My opinion at this point: I agree that ZIRP/NIRP do not work under the current business models that underpin our entire economy! (try it for yourself put a zero in a denominator of a fraction)... But I disagree this necessarily destroys the business models, maybe it does turn out very bad or maybe business models just change/fix the error as they were written poorly to begin with and things will be OK. Who knows.