3 ms·

Can someone explain this, Matt Levine-style? I mean, if someone offered to pay me interest to take out a loan, I'd immediately request MAXINT.

samizdis 6y ago
This isn't Matt Levine style, or calibre, but it covers the basics: https://www.investopedia.com/articles/investing/070915/how-negative-interest-rates-work.asp https://www.investopedia.com/articles/investing/070915/how-n...
toyg 6y ago
The point is precisely that the Powers That Be want you to take out MAXINT - and then unload it on the wider economy as cheap loans to stimulate the economy. Whether that second part actually happens, or banks just use this extra cash to stuff their balance sheets, well... it's a bit of an open question, to put it mildly.
- acapybara 6y ago
  See also: liquidity trap https://en.wikipedia.org/wiki/Liquidity_trap https://en.wikipedia.org/wiki/Liquidity_trap It's when, despite low/negative rates, borrowers prefer to hold cash than to take out loans.
- jbob2000 6y ago
  The biggest problem is that the things people want to buy are in short supply. So the extra money doesn't actually help anything, you just get asset price inflation. I want to buy a house. If everyone has access to cheap mortgages, then everybody can buy a house! But there is a hard limit on how fast we can build housing. Even renovating a home has the same problem. Contractors in my area are raising their hourly rate now because everybody wants their home renovated! But there aren't enough contractors for everyone, so the price just goes up. Look at the video card market. There's a hard limit on the amount of video cards that the industry can produce. That doesn't change if suddenly everyone can afford the $2,500 price tags. The price just goes up by exactly the amount of money people get loaned! And there's a hard limit on the amount of entertainment I can consume in a day. A person has about 16-20 hours a day MAX to consume media. We literally can't listen to any more music, there's not enough time in the day. I can't spend any more money on media because I am physically unable to consume more. I don't see how this would stimulate anything? The reason I'm not buying anything isn't because I can't afford it, it's because it's not available at all! (Probably why the stock market is experiencing volatility right now - it's the only thing providing utility right now)
JohnJamesRambo 6y ago
It’s a negative interest rate for banks to keep their money with a central bank. It is supposed to discourage banks from hoarding money and stimulate the economy by giving out more loans. Like all things economic there are debates about if it works or not. https://www.cnbc.com/2020/06/12/do-negative-interest-rates-work-economists-cant-agree-on-how-effective-the-policy-is.html https://www.cnbc.com/2020/06/12/do-negative-interest-rates-w...
- mprovost 6y ago
  But it's not just the rate with the central bank, they're forcing high street banks to prove that their systems can handle negative interest rates for consumer loans and mortgages.
- RobertoG 6y ago
  It's obvious that it doesn't work. In order banks be able to lend money it's necessary the existence of business and households that want to spend money instead of saving. What we are seeing, is the result of using the wrong tool, monetary policy instead of fiscal policy, because ideological reasons.
  - imtringued 6y ago
    >What we are seeing, is the result of using the wrong tool, monetary policy instead of fiscal policy, because ideological reasons. Yeah this is pretty much it. Businesses do benefit from lower interest rates but beyond a certain point they have zero trouble financing the investments they want to make. After that you have to figure out how to convince people to spend money and if people don't have money to begin with you have to give it to them somehow (most likely candidate is government spending).
  - codebolt 6y ago
    Denmark has been doing this for years. It's not a perfect solution but it hasn't been a complete disaster either.
- stephen_g 6y ago
acapybara 6y ago
A nominal zero or negative rate can still be a positive real rate. It depends on future inflation/deflation. While it's easy to point at M1, M2 money stock figures (or the UK equivalent) as indicative of inflation, sometimes deflationary pressures are greater than the inflationary pressures from increasing money supply.
u678u 6y ago
> I'd immediately request MAXINT. Would you really though. They're trying to avoid deflation, if/when that happens the value of property and shares falls each year. What would you do with your loan if all assets fall in value each year?
- xtracto 6y ago
  Crypto?
- londons_explore 6y ago
  If someone gives me a $10M loan at -1% interest, I would spend $200 on suitcases and a vacuum sealer kit and $200 to hire a mini-digger. I'd then go dig a 6 foot hole in a forest somewhere and hide the money as cash. I'd install some weather stations around the site with PIR sensors and 4G ($25 each, x4) just to see if someone comes hunting for my cash. After 5 years, I return the cash. I earn $500k. Subtract off the $500 it cost me to set up and that's a pretty tidy profit for 2 days of my time. The chance of theft is well under 1% as long as nobody else knows where it is, so I still make a tidy profit even with a risk premium.
- grey-area 6y ago
  They're trying to avoid retail deflation. That is not usually related to asset deflation. Asset inflation has been raging for at least a decade, maybe 2, inflating stock assets, housing and commodities, bitcoin and anything else which promises some return to unseen levels, since they started QE and dropped the low risk rate of return to 0. Retail inflation which they're trying to control is pretty much unaffected by QE and ZIRP and whatever levers they are pulling are not working, they just haven't noticed yet. So at this point, if someone offers you free money, you say thanks very much and put it in the stock market, like everyone else, because where else can you get a return? And that goes on until the whole thing explodes in a panicked crash when public pretension differs too much from private reality. Oops.
  - imtringued 6y ago
    Basically the problem is that governments and central banks are following policies that are generally used to stave off inflation. If you have massive inflation what you should invest into is domestic production capacity. Excess production causes prices to fall. If you want to reliably drive inflation then you must do the opposite. Put dollars into people's hands. Consumer demand must outpace domestic production capacity. Most cases of (hyper)inflation are basically episodes of excessive government spending without the necessary investment in production capacity to back that spending up.
notahacker 6y ago
The bank isn't going to pay anyone interest to take out a loan, still less a loan for MAXINT. It still has to cover repayment defaults and make a profit. But changing the base rate from 0.1% to -0.5% incentivises the banking system to loan to consumers and businesses at lower rates
- mrsuprawsm 6y ago
  You say that, but this is already happening in some places: https://www.theguardian.com/money/2019/aug/13/danish-bank-launches-worlds-first-negative-interest-rate-mortgage https://www.theguardian.com/money/2019/aug/13/danish-bank-la...
  - notahacker 6y ago
    Interesting, but as there are other charges involved the negative interest rate is a marketing ploy. The examples given on Jyske bank's website involve repaying more than disbursed https://www.jyskebank.dk/bolig/nyheder/realkredit-med-negativ-rente https://www.jyskebank.dk/bolig/nyheder/realkredit-med-negati...
  - Analemma_ 6y ago
    There was an HN discussion about this where several Danes mentioned that these loans still come with assorted fees and taxes which effectively amount to a low, but still positive, interest rate.
treis 6y ago
The origin of banks are people with castles agreeing to store valuables of people that don't have castles. You pay them to do that so you don't get robbed and lose your money. So if you take your max int loan, where are you going to put it? Anywhere you store it has risk. Cash under the mattress can get robbed and investments can go bad. If you really really want to be sure you get your money back then banks are the only option and in this case it's worth it to pay them.

samizdis 6y ago

This isn't Matt Levine style, or calibre, but it covers the basics: https://www.investopedia.com/articles/investing/070915/how-negative-interest-rates-work.asp https://www.investopedia.com/articles/investing/070915/how-n...

toyg 6y ago

The point is precisely that the Powers That Be want you to take out MAXINT - and then unload it on the wider economy as cheap loans to stimulate the economy. Whether that second part actually happens, or banks just use this extra cash to stuff their balance sheets, well... it's a bit of an open question, to put it mildly.

acapybara 6y ago
See also: liquidity trap https://en.wikipedia.org/wiki/Liquidity_trap https://en.wikipedia.org/wiki/Liquidity_trap It's when, despite low/negative rates, borrowers prefer to hold cash than to take out loans.
jbob2000 6y ago
The biggest problem is that the things people want to buy are in short supply. So the extra money doesn't actually help anything, you just get asset price inflation. I want to buy a house. If everyone has access to cheap mortgages, then everybody can buy a house! But there is a hard limit on how fast we can build housing. Even renovating a home has the same problem. Contractors in my area are raising their hourly rate now because everybody wants their home renovated! But there aren't enough contractors for everyone, so the price just goes up. Look at the video card market. There's a hard limit on the amount of video cards that the industry can produce. That doesn't change if suddenly everyone can afford the $2,500 price tags. The price just goes up by exactly the amount of money people get loaned! And there's a hard limit on the amount of entertainment I can consume in a day. A person has about 16-20 hours a day MAX to consume media. We literally can't listen to any more music, there's not enough time in the day. I can't spend any more money on media because I am physically unable to consume more. I don't see how this would stimulate anything? The reason I'm not buying anything isn't because I can't afford it, it's because it's not available at all! (Probably why the stock market is experiencing volatility right now - it's the only thing providing utility right now)

JohnJamesRambo 6y ago

It’s a negative interest rate for banks to keep their money with a central bank. It is supposed to discourage banks from hoarding money and stimulate the economy by giving out more loans. Like all things economic there are debates about if it works or not. https://www.cnbc.com/2020/06/12/do-negative-interest-rates-work-economists-cant-agree-on-how-effective-the-policy-is.html https://www.cnbc.com/2020/06/12/do-negative-interest-rates-w...

mprovost 6y ago
But it's not just the rate with the central bank, they're forcing high street banks to prove that their systems can handle negative interest rates for consumer loans and mortgages.
RobertoG 6y ago
It's obvious that it doesn't work. In order banks be able to lend money it's necessary the existence of business and households that want to spend money instead of saving. What we are seeing, is the result of using the wrong tool, monetary policy instead of fiscal policy, because ideological reasons.
- imtringued 6y ago
  >What we are seeing, is the result of using the wrong tool, monetary policy instead of fiscal policy, because ideological reasons. Yeah this is pretty much it. Businesses do benefit from lower interest rates but beyond a certain point they have zero trouble financing the investments they want to make. After that you have to figure out how to convince people to spend money and if people don't have money to begin with you have to give it to them somehow (most likely candidate is government spending).
- codebolt 6y ago
  Denmark has been doing this for years. It's not a perfect solution but it hasn't been a complete disaster either.
stephen_g 6y ago

acapybara 6y ago

A nominal zero or negative rate can still be a positive real rate. It depends on future inflation/deflation. While it's easy to point at M1, M2 money stock figures (or the UK equivalent) as indicative of inflation, sometimes deflationary pressures are greater than the inflationary pressures from increasing money supply.

u678u 6y ago

> I'd immediately request MAXINT. Would you really though. They're trying to avoid deflation, if/when that happens the value of property and shares falls each year. What would you do with your loan if all assets fall in value each year?

xtracto 6y ago
Crypto?
londons_explore 6y ago
If someone gives me a $10M loan at -1% interest, I would spend $200 on suitcases and a vacuum sealer kit and $200 to hire a mini-digger. I'd then go dig a 6 foot hole in a forest somewhere and hide the money as cash. I'd install some weather stations around the site with PIR sensors and 4G ($25 each, x4) just to see if someone comes hunting for my cash. After 5 years, I return the cash. I earn $500k. Subtract off the $500 it cost me to set up and that's a pretty tidy profit for 2 days of my time. The chance of theft is well under 1% as long as nobody else knows where it is, so I still make a tidy profit even with a risk premium.
grey-area 6y ago
They're trying to avoid retail deflation. That is not usually related to asset deflation. Asset inflation has been raging for at least a decade, maybe 2, inflating stock assets, housing and commodities, bitcoin and anything else which promises some return to unseen levels, since they started QE and dropped the low risk rate of return to 0. Retail inflation which they're trying to control is pretty much unaffected by QE and ZIRP and whatever levers they are pulling are not working, they just haven't noticed yet. So at this point, if someone offers you free money, you say thanks very much and put it in the stock market, like everyone else, because where else can you get a return? And that goes on until the whole thing explodes in a panicked crash when public pretension differs too much from private reality. Oops.
- imtringued 6y ago
  Basically the problem is that governments and central banks are following policies that are generally used to stave off inflation. If you have massive inflation what you should invest into is domestic production capacity. Excess production causes prices to fall. If you want to reliably drive inflation then you must do the opposite. Put dollars into people's hands. Consumer demand must outpace domestic production capacity. Most cases of (hyper)inflation are basically episodes of excessive government spending without the necessary investment in production capacity to back that spending up.

notahacker 6y ago

The bank isn't going to pay anyone interest to take out a loan, still less a loan for MAXINT. It still has to cover repayment defaults and make a profit. But changing the base rate from 0.1% to -0.5% incentivises the banking system to loan to consumers and businesses at lower rates

mrsuprawsm 6y ago
You say that, but this is already happening in some places: https://www.theguardian.com/money/2019/aug/13/danish-bank-launches-worlds-first-negative-interest-rate-mortgage https://www.theguardian.com/money/2019/aug/13/danish-bank-la...
- notahacker 6y ago
  Interesting, but as there are other charges involved the negative interest rate is a marketing ploy. The examples given on Jyske bank's website involve repaying more than disbursed https://www.jyskebank.dk/bolig/nyheder/realkredit-med-negativ-rente https://www.jyskebank.dk/bolig/nyheder/realkredit-med-negati...
- Analemma_ 6y ago
  There was an HN discussion about this where several Danes mentioned that these loans still come with assorted fees and taxes which effectively amount to a low, but still positive, interest rate.

treis 6y ago

The origin of banks are people with castles agreeing to store valuables of people that don't have castles. You pay them to do that so you don't get robbed and lose your money. So if you take your max int loan, where are you going to put it? Anywhere you store it has risk. Cash under the mattress can get robbed and investments can go bad. If you really really want to be sure you get your money back then banks are the only option and in this case it's worth it to pay them.