Author Topic: Negative interest rates.  (Read 8732 times)


Bardo

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Re: Negative interest rates.
« Reply #1 on: February 12, 2016, 11:30:21 AM »
I think it is likely a matter of time in the US, especially if the economy slows down or deflation appears more likely.  In a world where other economies utilize negative rates it will be increasingly hard to resist it as an approach to stimulating the economy.

Bucksandreds

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Re: Negative interest rates.
« Reply #2 on: February 12, 2016, 01:40:52 PM »
I think it is likely a matter of time in the US, especially if the economy slows down or deflation appears more likely.  In a world where other economies utilize negative rates it will be increasingly hard to resist it as an approach to stimulating the economy.

It makes so much short term sense to trash your currency that I'm not sure why we raised rates at a time when everyone else was lowering them. Our exports are slowing down as the dollar is so strong. Inflation isn't happening right now. We don't need negative rates here right now. The fed should lower their rate back to zero, however.

Curbside Prophet

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Re: Negative interest rates.
« Reply #3 on: February 12, 2016, 01:43:30 PM »
I think it is likely a matter of time in the US, especially if the economy slows down or deflation appears more likely.  In a world where other economies utilize negative rates it will be increasingly hard to resist it as an approach to stimulating the economy.

It makes so much short term sense to trash your currency that I'm not sure why we raised rates at a time when everyone else was lowering them. Our exports are slowing down as the dollar is so strong. Inflation isn't happening right now. We don't need negative rates here right now. The fed should lower their rate back to zero, however.

This.  We are in the midst of a global currency war and it's completely nonsensical for the Fed to raise rates now.

nereo

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Re: Negative interest rates.
« Reply #4 on: February 12, 2016, 02:27:38 PM »
I think it is likely a matter of time in the US, especially if the economy slows down or deflation appears more likely.  In a world where other economies utilize negative rates it will be increasingly hard to resist it as an approach to stimulating the economy.

It makes so much short term sense to trash your currency that I'm not sure why we raised rates at a time when everyone else was lowering them. Our exports are slowing down as the dollar is so strong. Inflation isn't happening right now. We don't need negative rates here right now. The fed should lower their rate back to zero, however.

This.  We are in the midst of a global currency war and it's completely nonsensical for the Fed to raise rates now.
Respectfully disagree.  All macroeconomic indicators in the US have been getting slightly better over time.  Employment is low, inflation is there but low, wages are rising slowly, corporate profits have been doing very well for the last several years, and household debt-to-GDP has been steadily falling.  I'd rather the rates were higher, giving the Fed a few more conventional bullets to use for the next downturn. I find the argument that rates shouldn't be slowly raised because "it's worse outside the US" to be very strange.

Arktinkerer

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Re: Negative interest rates.
« Reply #5 on: February 12, 2016, 02:30:55 PM »
Under what policy does it make sense for people to have negative interest rates?  Banks would have to charge to have accounts otherwise you would just borrow and put it in an account.  Outside of that, negative interest really only makes sense if it costs you more to store the money than it pays to borrow.  i.e. How much does it cost to protect the cash?  Clearly, you need more than a warehouse...

How does the economics of this work in the real world?

nereo

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Re: Negative interest rates.
« Reply #6 on: February 12, 2016, 02:35:45 PM »
Under what policy does it make sense for people to have negative interest rates?  Banks would have to charge to have accounts otherwise you would just borrow and put it in an account.  Outside of that, negative interest really only makes sense if it costs you more to store the money than it pays to borrow.  i.e. How much does it cost to protect the cash?  Clearly, you need more than a warehouse...

How does the economics of this work in the real world?
Until recently it hadn't been done by a major economy.  Japan (3rd largest economy in the world) just went negative in January.  Sweden recently followed.  Canada has also openly considered it.  How it will work over the long term has been largely theoretical.  I guess we will know more over hte next few months and years.

An article in the NY Times about it.  EDIT:  D'oh, that just links back to original article in OP.
« Last Edit: February 12, 2016, 02:47:07 PM by nereo »

Mr_Eric

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Re: Negative interest rates.
« Reply #7 on: February 12, 2016, 03:21:27 PM »
Oh wow, look at all the macro tourists! lol

BTW- Negative interest rates doesn't mean the average Joe having to pay the bank to hold his deposits.

Bucksandreds

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Re: Negative interest rates.
« Reply #8 on: February 12, 2016, 05:05:31 PM »
Under what policy does it make sense for people to have negative interest rates?  Banks would have to charge to have accounts otherwise you would just borrow and put it in an account.  Outside of that, negative interest really only makes sense if it costs you more to store the money than it pays to borrow.  i.e. How much does it cost to protect the cash?  Clearly, you need more than a warehouse...

How does the economics of this work in the real world?

Consumers can't get these negative rates.  Only banks borrowing from the fed.  Your checking/savings account may charge .25% per year but your 30 year home loan would still be 3.25%

Arktinkerer

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Re: Negative interest rates.
« Reply #9 on: February 12, 2016, 05:41:24 PM »
Under what policy does it make sense for people to have negative interest rates?  Banks would have to charge to have accounts otherwise you would just borrow and put it in an account.  Outside of that, negative interest really only makes sense if it costs you more to store the money than it pays to borrow.  i.e. How much does it cost to protect the cash?  Clearly, you need more than a warehouse...

How does the economics of this work in the real world?

Consumers can't get these negative rates.  Only banks borrowing from the fed.  Your checking/savings account may charge .25% per year but your 30 year home loan would still be 3.25%

They are paying small businesses in Denmark!


http://www.ft.com/cms/s/0/7f4e2f4c-dde3-11e4-9d29-00144feab7de.html

Arktinkerer

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Re: Negative interest rates.
« Reply #10 on: February 12, 2016, 05:43:33 PM »
Oh wow, look at all the macro tourists! lol

BTW- Negative interest rates doesn't mean the average Joe having to pay the bank to hold his deposits.

It tends to lead to that--banks start charging to hold funds especially if they aren't getting enough from service charges.  Read about some of the other countries that went negative.  Banks have to make money somehow.

Curbside Prophet

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Re: Negative interest rates.
« Reply #11 on: February 12, 2016, 06:34:33 PM »
I think it is likely a matter of time in the US, especially if the economy slows down or deflation appears more likely.  In a world where other economies utilize negative rates it will be increasingly hard to resist it as an approach to stimulating the economy.

It makes so much short term sense to trash your currency that I'm not sure why we raised rates at a time when everyone else was lowering them. Our exports are slowing down as the dollar is so strong. Inflation isn't happening right now. We don't need negative rates here right now. The fed should lower their rate back to zero, however.

This.  We are in the midst of a global currency war and it's completely nonsensical for the Fed to raise rates now.
Respectfully disagree.  All macroeconomic indicators in the US have been getting slightly better over time.  Employment is low, inflation is there but low, wages are rising slowly, corporate profits have been doing very well for the last several years, and household debt-to-GDP has been steadily falling.  I'd rather the rates were higher, giving the Fed a few more conventional bullets to use for the next downturn. I find the argument that rates shouldn't be slowly raised because "it's worse outside the US" to be very strange.

"Slightly better" being the operative word.  And to get this slight improvement we've thrown trillions of dollars at the problem.  Dollars that instead of being invested in working assets (for instance, to be used to rebuild our crumbling infrastructure) has been used to recapitalize banks and share buybacks.  That will need to be repaid or inflated away. 

The argument isn't rates should be kept low because it's worse outside of the US, the argument is that raising rates will increase an already strong dollar, which is bad for the economy.

aspiringnomad

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Re: Negative interest rates.
« Reply #12 on: February 12, 2016, 07:29:53 PM »
I think it is likely a matter of time in the US, especially if the economy slows down or deflation appears more likely.  In a world where other economies utilize negative rates it will be increasingly hard to resist it as an approach to stimulating the economy.

It makes so much short term sense to trash your currency that I'm not sure why we raised rates at a time when everyone else was lowering them. Our exports are slowing down as the dollar is so strong. Inflation isn't happening right now. We don't need negative rates here right now. The fed should lower their rate back to zero, however.

This.  We are in the midst of a global currency war and it's completely nonsensical for the Fed to raise rates now.
Respectfully disagree.  All macroeconomic indicators in the US have been getting slightly better over time.  Employment is low, inflation is there but low, wages are rising slowly, corporate profits have been doing very well for the last several years, and household debt-to-GDP has been steadily falling.  I'd rather the rates were higher, giving the Fed a few more conventional bullets to use for the next downturn. I find the argument that rates shouldn't be slowly raised because "it's worse outside the US" to be very strange.

"Slightly better" being the operative word.  And to get this slight improvement we've thrown trillions of dollars at the problem.  Dollars that instead of being invested in working assets (for instance, to be used to rebuild our crumbling infrastructure) has been used to recapitalize banks and share buybacks.  That will need to be repaid or inflated away. 

The argument isn't rates should be kept low because it's worse outside of the US, the argument is that raising rates will increase an already strong dollar, which is bad for the economy.

I agree that US indicators have been slowly improving, but turmoil in global markets certainly affects the US. If it's sustained or intense enough, it can overwhelm positive domestic trends. The relative strength of the dollar is just one way it might negatively affect the US, but slowing overall demand from global consumers (e.g., China) is more concerning, IMO.

Mr_Eric

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Re: Negative interest rates.
« Reply #13 on: February 12, 2016, 09:33:51 PM »
Oh wow, look at all the macro tourists! lol

BTW- Negative interest rates doesn't mean the average Joe having to pay the bank to hold his deposits.

It tends to lead to that--banks start charging to hold funds especially if they aren't getting enough from service charges.  Read about some of the other countries that went negative.  Banks have to make money somehow.

They don't tend to lead to that for the average Joe. Banks have to consider bank runs, cash hoarding, panic, etc.

Syonyk

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Re: Negative interest rates.
« Reply #14 on: February 13, 2016, 09:19:55 AM »
The only way you can really enforce negative interest rates ("Account balance based service fees" are more likely in implementation than actually calling it a negative interest rate) is by banning cash in any useful quantities.

Which, of course, is also on the table and keeps getting talked about.  To... "reduce crime."  Or drugs.  Or think of the Children.  Or something.  It does make a black market economy and a "cash economy" harder to do if you can't transmit value between people without the banks and government knowing.

In any case, we're into pretty well uncharted waters financially.  It might be worth keeping some savings in physical assets instead of the banking system (land, housing, metals, tools, whatever).  I know blind trust in the Fed and banks is pretty common here, but things that can't last forever don't, and our currency is well past the average age of fiat currencies.


Yaeger

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Re: Negative interest rates.
« Reply #15 on: February 13, 2016, 11:00:24 AM »
We've already been see this at the low interest rates we've been at for years now. Even in savings accounts the money in your bank account isn't protected from inflation, you're essentially paying for the privilege of storing your money. It'll just get worse under negative rates.

It's like buying Swedish government bonds with a negative yield. You're paying to lose less, might as well just buy gold or silver.

Bardo

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Re: Negative interest rates.
« Reply #16 on: February 13, 2016, 11:07:15 AM »
Under what policy does it make sense for people to have negative interest rates?  Banks would have to charge to have accounts otherwise you would just borrow and put it in an account.  Outside of that, negative interest really only makes sense if it costs you more to store the money than it pays to borrow.  i.e. How much does it cost to protect the cash?  Clearly, you need more than a warehouse...

How does the economics of this work in the real world?

Negative interest rates start to make sense in deflationary environments.  With deflation, in theory you can have a positive real return even with negative interest rates.  The message to savers is that in a world awash with excess capital there is little value to more savings.  It fits in rather nicely with the secular stagnation hypothesis. 

Negative rates will also blow holes in some people's retirement savings strategies.


Bardo

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Re: Negative interest rates.
« Reply #17 on: February 13, 2016, 11:18:38 AM »
I think it is likely a matter of time in the US, especially if the economy slows down or deflation appears more likely.  In a world where other economies utilize negative rates it will be increasingly hard to resist it as an approach to stimulating the economy.

It makes so much short term sense to trash your currency that I'm not sure why we raised rates at a time when everyone else was lowering them. Our exports are slowing down as the dollar is so strong. Inflation isn't happening right now. We don't need negative rates here right now. The fed should lower their rate back to zero, however.

This.  We are in the midst of a global currency war and it's completely nonsensical for the Fed to raise rates now.
Respectfully disagree.  All macroeconomic indicators in the US have been getting slightly better over time.  Employment is low, inflation is there but low, wages are rising slowly, corporate profits have been doing very well for the last several years, and household debt-to-GDP has been steadily falling.  I'd rather the rates were higher, giving the Fed a few more conventional bullets to use for the next downturn. I find the argument that rates shouldn't be slowly raised because "it's worse outside the US" to be very strange.

"Slightly better" being the operative word.  And to get this slight improvement we've thrown trillions of dollars at the problem.  Dollars that instead of being invested in working assets (for instance, to be used to rebuild our crumbling infrastructure) has been used to recapitalize banks and share buybacks.  That will need to be repaid or inflated away. 


Money spent on recapitalizing banks during the crisis didn't displace infrastructure spending.  These are both political decisions.  In a low- to negative-rate regime it would make all the sense in the world for governments to borrow what they could to improve infrastructure.


nereo

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Re: Negative interest rates.
« Reply #18 on: February 13, 2016, 11:50:43 AM »
Respectfully disagree.  All macroeconomic indicators in the US have been getting slightly better over time.  Employment is low, inflation is there but low, wages are rising slowly, corporate profits have been doing very well for the last several years, and household debt-to-GDP has been steadily falling.  I'd rather the rates were higher, giving the Fed a few more conventional bullets to use for the next downturn. I find the argument that rates shouldn't be slowly raised because "it's worse outside the US" to be very strange.

"Slightly better" being the operative word.  And to get this slight improvement we've thrown trillions of dollars at the problem.  Dollars that instead of being invested in working assets (for instance, to be used to rebuild our crumbling infrastructure) has been used to recapitalize banks and share buybacks.  That will need to be repaid or inflated away. 

The argument isn't rates should be kept low because it's worse outside of the US, the argument is that raising rates will increase an already strong dollar, which is bad for the economy.
Ok, so at what point do we raise rates?  Having them so low is also dangerous insomuch as it leaves fewer conventional tools in the toolbox.  We aren't even looking at rates raising close to the historic norm, but from going near zero to just slightly above zero.
I agree it sucks for exports that the dollar is so strong, but what will we do to combat the next recession?

Yaeger

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Re: Negative interest rates.
« Reply #19 on: February 13, 2016, 12:20:55 PM »
Ok, so at what point do we raise rates?  Having them so low is also dangerous insomuch as it leaves fewer conventional tools in the toolbox.  We aren't even looking at rates raising close to the historic norm, but from going near zero to just slightly above zero.
I agree it sucks for exports that the dollar is so strong, but what will we do to combat the next recession?

I think we're trapped. With these rates it's easy for the government to run deficits while minimizing the impact to the economy. It's cheap borrowing. There's a Catch-22 though, the more we borrow the more the National Debt grows which would be unsustainable at higher interest rates, especially if we run into an inflationary environment (inflation in the 1970's reached 14%)

Damned if we do, damned if we don't. It's just more politically viable to make things better now and kick the can down the road. Woe be to the responsible politician that raises rates. The public will crucify him/her for the actions of past politicians.

nereo

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Re: Negative interest rates.
« Reply #20 on: February 13, 2016, 12:37:31 PM »

Damned if we do, damned if we don't. It's just more politically viable to make things better now and kick the can down the road. Woe be to the responsible politician that raises rates. The public will crucify him/her for the actions of past politicians.

Isn't this why we have a Fed that's not under congressional oversight?  I shudder to think how things might work if all this talk of "reign in the Fed" (e.g. making the Fed somehow subservient to Congress) would go, politically.

Indexer

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Re: Negative interest rates.
« Reply #21 on: February 13, 2016, 01:01:39 PM »
Today we think of giving money to a bank, which they lend back out as a loan to someone else, and then they pay us interest which is less than what they earn. You get interest, and they get a profit. Everyone is happy.

Think to a situation where there is less lending. Instead of the above happening you might pay the bank to 'protect' your money. You don't want cash sitting at your house. You are paying the bank for the safety of its vault(and now it's FDIC insurance). People with small deposits might still do this. Many banks charge a fee to any customer that has less than X deposits especially if they don't have direct deposit.

So the idea of negative interest rates isn't extreme. If people want their money protected more than other people want loans it is very possible a bank will have way too much in deposits and have to begin charging interest for the 'safety' instead of paying interest. So this could happen without the intervention of a central bank.

Side note: Once you figure in inflation, you are basically always paying the bank to protect your money. ;)

Mr_Eric

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Re: Negative interest rates.
« Reply #22 on: February 13, 2016, 01:53:12 PM »
Today we think of giving money to a bank, which they lend back out as a loan to someone else, and then they pay us interest which is less than what they earn. You get interest, and they get a profit. Everyone is happy.

Think to a situation where there is less lending. Instead of the above happening you might pay the bank to 'protect' your money. You don't want cash sitting at your house. You are paying the bank for the safety of its vault(and now it's FDIC insurance). People with small deposits might still do this. Many banks charge a fee to any customer that has less than X deposits especially if they don't have direct deposit.

So the idea of negative interest rates isn't extreme. If people want their money protected more than other people want loans it is very possible a bank will have way too much in deposits and have to begin charging interest for the 'safety' instead of paying interest. So this could happen without the intervention of a central bank.

Side note: Once you figure in inflation, you are basically always paying the bank to protect your money. ;)

Except that's not really how it works. Banks lend money by creating it out of thin air. Banks are constrained by credit-worthy borrowers and credit demand, not by the average Joe putting in their deposits so the bank can turnaround and lend that money out. The idea of negative interest rates, on a nominal basis of course, to the average Joe and his deposits is quite extreme. If the bank said "We're charging you -1%" for deposits, they run the risk of panic, bank runs, and cash hoarding. Like someone previously mentioned here, cash would probably need to be outlawed before negative interest rates took hold of the average Joe's bank deposits.

Syonyk

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Re: Negative interest rates.
« Reply #23 on: February 13, 2016, 02:09:47 PM »
If the bank said "We're charging you -1%" for deposits, they run the risk of panic, bank runs, and cash hoarding. Like someone previously mentioned here, cash would probably need to be outlawed before negative interest rates took hold of the average Joe's bank deposits.

The bank will never say, "Deposit interest is negative."

They're much more likely to charge a "1% annual service fee for checking" or something.

lemanfan

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Re: Negative interest rates.
« Reply #24 on: February 13, 2016, 02:37:22 PM »
The bank will never say, "Deposit interest is negative."

They're much more likely to charge a "1% annual service fee for checking" or something.

I'm Swedish.  Our Riksbank just lowered the repo rate from -0,35% to -0,50%.   Do note that this is the repo rate, which is only used when banks deposit money with the Riksbank - most real rates that individuals or companies can get are either 0% (most savings accounts in the big banks) or above 0% (especially for lenders).

The bank that my company uses have however have sent out letters announcing changes in their terms and conditions to allow for negative rates on company accounts.... 


aspiringnomad

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Re: Negative interest rates.
« Reply #25 on: February 13, 2016, 02:56:03 PM »
Today we think of giving money to a bank, which they lend back out as a loan to someone else, and then they pay us interest which is less than what they earn. You get interest, and they get a profit. Everyone is happy.

Think to a situation where there is less lending. Instead of the above happening you might pay the bank to 'protect' your money. You don't want cash sitting at your house. You are paying the bank for the safety of its vault(and now it's FDIC insurance). People with small deposits might still do this. Many banks charge a fee to any customer that has less than X deposits especially if they don't have direct deposit.

So the idea of negative interest rates isn't extreme. If people want their money protected more than other people want loans it is very possible a bank will have way too much in deposits and have to begin charging interest for the 'safety' instead of paying interest. So this could happen without the intervention of a central bank.

Side note: Once you figure in inflation, you are basically always paying the bank to protect your money. ;)

Except that's not really how it works. Banks lend money by creating it out of thin air. Banks are constrained by credit-worthy borrowers and credit demand, not by the average Joe putting in their deposits so the bank can turnaround and lend that money out. The idea of negative interest rates, on a nominal basis of course, to the average Joe and his deposits is quite extreme. If the bank said "We're charging you -1%" for deposits, they run the risk of panic, bank runs, and cash hoarding. Like someone previously mentioned here, cash would probably need to be outlawed before negative interest rates took hold of the average Joe's bank deposits.

1) I think Indexer was just pointing out how traditional commercial banks make money (i.e., NIM), not suggesting that deposits are loaned out dollar-for-dollar. 
2) Relating to that, beyond loan demand and creditworthiness, banks are also constrained by the deposits of thousands or millions of Joe's, average or otherwise, that they are required to hold in the form of reserve requirements, which have become increasingly stringent in recent years.
3) Panic and bank runs have more to do with the risk of losing your deposits entirely due to insolvency, as happened from time-to-time prior to the FDIC and as continues to happen in some countries. But there's no precedence to suggest that negative interest on deposits would lead to bank runs. Obviously, depositors are always free to shop around for the best rate, so banks would need to be very cautious in making such a move and probably would want to phase it in slowly and in-line with competitors, but it's already happened to some degree in Switzerland and appears on the horizon in Sweden. Most people probably can't tell you the interest rate on their banking accounts, except that it's close to zero. Any move into the negative territory would just move to the other side of close to zero. In any case, I think it's very unlikely to happen here, but just pointing out that it wouldn't be as extreme as you suggest if it did.

Syonyk

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Re: Negative interest rates.
« Reply #26 on: February 13, 2016, 03:43:48 PM »
Mostly, I think the whole discussion just demonstrates how little control the central banks really have over what's going on out in the reality outside their walls...

"Guys, step on the accelerator, the economy isn't ramping up as fast as we want!"

"But it's floored!"

"Well, then, use the super secret accelerator!"

coolistdude

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Re: Negative interest rates.
« Reply #27 on: February 13, 2016, 03:52:55 PM »
Mostly, I think the whole discussion just demonstrates how little control the central banks really have over what's going on out in the reality outside their walls...

"Guys, step on the accelerator, the economy isn't ramping up as fast as we want!"

"But it's floored!"

"Well, then, use the super secret accelerator!"

"QE?"
"No you fool! Take out the floorboards! Future be damned!"
POTUS (slightly later): "I created five million jobs"
Other party: "No you didn't! We would have created 10 million jobs!"
Fed (slightly later): "This isn't working no mo'. We need lots of QE!"
POTUS (slightly later): "I create five million more jobs"
Other party: "You shouldn't be president!"

nobodyspecial

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Re: Negative interest rates.
« Reply #28 on: February 13, 2016, 07:28:53 PM »
I'm Swedish.  Our Riksbank just lowered the repo rate from -0,35% to -0,50%.   Do note that this is the repo rate, which is only used when banks deposit money with the Riksbank
The idea being that the banks then prefer to lend that to business to grow and consumers to spend.
One of the reasons that QE had so little inflationary effect was that the bank simply took the money from the govt and redeposited it with the government.

Syonyk

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Re: Negative interest rates.
« Reply #29 on: February 13, 2016, 07:59:12 PM »
The idea being that the banks then prefer to lend that to business to grow and consumers to spend.

Yes, how dare those consumers save for the future!  They must be forced to stimulate the economy, NOW!

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Re: Negative interest rates.
« Reply #30 on: February 13, 2016, 08:24:37 PM »
Oh wow, look at all the macro tourists! lol

BTW- Negative interest rates doesn't mean the average Joe having to pay the bank to hold his deposits.

In this context that is what it means. You pay to have the bank hold your money.

Mr_Eric

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Re: Negative interest rates.
« Reply #31 on: February 13, 2016, 09:51:40 PM »
Today we think of giving money to a bank, which they lend back out as a loan to someone else, and then they pay us interest which is less than what they earn. You get interest, and they get a profit. Everyone is happy.

Think to a situation where there is less lending. Instead of the above happening you might pay the bank to 'protect' your money. You don't want cash sitting at your house. You are paying the bank for the safety of its vault(and now it's FDIC insurance). People with small deposits might still do this. Many banks charge a fee to any customer that has less than X deposits especially if they don't have direct deposit.

So the idea of negative interest rates isn't extreme. If people want their money protected more than other people want loans it is very possible a bank will have way too much in deposits and have to begin charging interest for the 'safety' instead of paying interest. So this could happen without the intervention of a central bank.

Side note: Once you figure in inflation, you are basically always paying the bank to protect your money. ;)

Except that's not really how it works. Banks lend money by creating it out of thin air. Banks are constrained by credit-worthy borrowers and credit demand, not by the average Joe putting in their deposits so the bank can turnaround and lend that money out. The idea of negative interest rates, on a nominal basis of course, to the average Joe and his deposits is quite extreme. If the bank said "We're charging you -1%" for deposits, they run the risk of panic, bank runs, and cash hoarding. Like someone previously mentioned here, cash would probably need to be outlawed before negative interest rates took hold of the average Joe's bank deposits.

1) I think Indexer was just pointing out how traditional commercial banks make money (i.e., NIM), not suggesting that deposits are loaned out dollar-for-dollar. 
2) Relating to that, beyond loan demand and creditworthiness, banks are also constrained by the deposits of thousands or millions of Joe's, average or otherwise, that they are required to hold in the form of reserve requirements, which have become increasingly stringent in recent years.
3) Panic and bank runs have more to do with the risk of losing your deposits entirely due to insolvency, as happened from time-to-time prior to the FDIC and as continues to happen in some countries. But there's no precedence to suggest that negative interest on deposits would lead to bank runs. Obviously, depositors are always free to shop around for the best rate, so banks would need to be very cautious in making such a move and probably would want to phase it in slowly and in-line with competitors, but it's already happened to some degree in Switzerland and appears on the horizon in Sweden. Most people probably can't tell you the interest rate on their banking accounts, except that it's close to zero. Any move into the negative territory would just move to the other side of close to zero. In any case, I think it's very unlikely to happen here, but just pointing out that it wouldn't be as extreme as you suggest if it did.

In regard to #2: Banks are not really constrained by reserve requirements. They can always find reserves after the fact. Cullen Roche over at Pragmatic Capitalism explains this far better than I ever could. I suggest reading some of his papers on the banking system. He's a huge banking nerd but explains things quite well.

In regard to #3: The bank run risk from negative interest rates come from depositors saying "Gee, you know what, why the heck would I pay the bank to just hold my money? I'll withdraw my money and store it under my mattress or that online bank that doesn't charge me anything." People like to say the bank offers security in return, but considering how little money Americans keep in banks on an individual level, I don't think there's huge risk keeping $500 or $1,000 in cash at home.

Yes, there's no precedence because the US hasn't had negative interest rates (at least as far as I know). But you can use logic and see where a bank run might occur at certain banks if they did in fact start charging the average Joe negative rates.

Yaeger

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Re: Negative interest rates.
« Reply #32 on: February 13, 2016, 11:01:27 PM »
Yes, there's no precedence because the US hasn't had negative interest rates (at least as far as I know). But you can use logic and see where a bank run might occur at certain banks if they did in fact start charging the average Joe negative rates.

They'll never make it that obvious, the banks will just impose fees and transaction costs with a (nearly) zero account interest rate. People will be screaming bloody murder at the 'greedy' bankers, remain oblivious to the inflation eating them alive, and ignore the man behind the curtain slowly stealing your savings.

faramund

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Re: Negative interest rates.
« Reply #33 on: February 13, 2016, 11:26:06 PM »
I wish they'd put interest rates back to say 0.1, and if they want to loosen monetary policy, just do either similar to Alaska, and print money to pay for sending everyone a cheque, or make a deal with the government, that they'll print and then give them $X - as long as they use it on some new spending that will be done quickly.

Remember, the reason they are doing this is because inflation is too low (or negative). What's the problem with reserve banks printing money - it causes inflation. The question is, just how much to do.

Down here in Australia, the government sent cheques out to people (i.e. free money), and went on an infrastructure binge (every school in the country got a new building). All this was pretty much paid for by debt. But with low/negative inflation, just do the same, but print it!

lemanfan

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Re: Negative interest rates.
« Reply #34 on: February 14, 2016, 05:21:07 AM »
I'm Swedish.  Our Riksbank just lowered the repo rate from -0,35% to -0,50%.   Do note that this is the repo rate, which is only used when banks deposit money with the Riksbank
The idea being that the banks then prefer to lend that to business to grow and consumers to spend.

But at the same time, new banking regulations have made it very VERY hard for many businesses to get loans.  Oh well.  We live in interesting times. :)

At least the stock market is getting a bit cheaper now.

Bucksandreds

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Re: Negative interest rates.
« Reply #35 on: February 14, 2016, 05:43:47 AM »
Here's an MSN article about how people are traveling less to the U.S. because the dollar is so strong.

http://www.msn.com/en-us/money/markets/the-worlds-jet-setters-have-noticed-some-of-their-people-are-missing/ar-BBptMXc?li=BBnbfcN

When every other country is attacking its own currency, you can't let them overvalue yours so much as to destroy your industry and tourism. I know attacking your own currency seems counterintuitive but it's been reality for 100 years.

aspiringnomad

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Re: Negative interest rates.
« Reply #36 on: February 14, 2016, 02:30:56 PM »
Today we think of giving money to a bank, which they lend back out as a loan to someone else, and then they pay us interest which is less than what they earn. You get interest, and they get a profit. Everyone is happy.

Think to a situation where there is less lending. Instead of the above happening you might pay the bank to 'protect' your money. You don't want cash sitting at your house. You are paying the bank for the safety of its vault(and now it's FDIC insurance). People with small deposits might still do this. Many banks charge a fee to any customer that has less than X deposits especially if they don't have direct deposit.

So the idea of negative interest rates isn't extreme. If people want their money protected more than other people want loans it is very possible a bank will have way too much in deposits and have to begin charging interest for the 'safety' instead of paying interest. So this could happen without the intervention of a central bank.

Side note: Once you figure in inflation, you are basically always paying the bank to protect your money. ;)

Except that's not really how it works. Banks lend money by creating it out of thin air. Banks are constrained by credit-worthy borrowers and credit demand, not by the average Joe putting in their deposits so the bank can turnaround and lend that money out. The idea of negative interest rates, on a nominal basis of course, to the average Joe and his deposits is quite extreme. If the bank said "We're charging you -1%" for deposits, they run the risk of panic, bank runs, and cash hoarding. Like someone previously mentioned here, cash would probably need to be outlawed before negative interest rates took hold of the average Joe's bank deposits.

1) I think Indexer was just pointing out how traditional commercial banks make money (i.e., NIM), not suggesting that deposits are loaned out dollar-for-dollar. 
2) Relating to that, beyond loan demand and creditworthiness, banks are also constrained by the deposits of thousands or millions of Joe's, average or otherwise, that they are required to hold in the form of reserve requirements, which have become increasingly stringent in recent years.
3) Panic and bank runs have more to do with the risk of losing your deposits entirely due to insolvency, as happened from time-to-time prior to the FDIC and as continues to happen in some countries. But there's no precedence to suggest that negative interest on deposits would lead to bank runs. Obviously, depositors are always free to shop around for the best rate, so banks would need to be very cautious in making such a move and probably would want to phase it in slowly and in-line with competitors, but it's already happened to some degree in Switzerland and appears on the horizon in Sweden. Most people probably can't tell you the interest rate on their banking accounts, except that it's close to zero. Any move into the negative territory would just move to the other side of close to zero. In any case, I think it's very unlikely to happen here, but just pointing out that it wouldn't be as extreme as you suggest if it did.

In regard to #2: Banks are not really constrained by reserve requirements. They can always find reserves after the fact. Cullen Roche over at Pragmatic Capitalism explains this far better than I ever could. I suggest reading some of his papers on the banking system. He's a huge banking nerd but explains things quite well.


Sure, they could, but some bankers would give up their first born before issuing new common equity. And debt, including all hybrid debt, is excluded from CET1.

Mr_Eric

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Re: Negative interest rates.
« Reply #37 on: February 14, 2016, 02:41:03 PM »
Today we think of giving money to a bank, which they lend back out as a loan to someone else, and then they pay us interest which is less than what they earn. You get interest, and they get a profit. Everyone is happy.

Think to a situation where there is less lending. Instead of the above happening you might pay the bank to 'protect' your money. You don't want cash sitting at your house. You are paying the bank for the safety of its vault(and now it's FDIC insurance). People with small deposits might still do this. Many banks charge a fee to any customer that has less than X deposits especially if they don't have direct deposit.

So the idea of negative interest rates isn't extreme. If people want their money protected more than other people want loans it is very possible a bank will have way too much in deposits and have to begin charging interest for the 'safety' instead of paying interest. So this could happen without the intervention of a central bank.

Side note: Once you figure in inflation, you are basically always paying the bank to protect your money. ;)

Except that's not really how it works. Banks lend money by creating it out of thin air. Banks are constrained by credit-worthy borrowers and credit demand, not by the average Joe putting in their deposits so the bank can turnaround and lend that money out. The idea of negative interest rates, on a nominal basis of course, to the average Joe and his deposits is quite extreme. If the bank said "We're charging you -1%" for deposits, they run the risk of panic, bank runs, and cash hoarding. Like someone previously mentioned here, cash would probably need to be outlawed before negative interest rates took hold of the average Joe's bank deposits.

1) I think Indexer was just pointing out how traditional commercial banks make money (i.e., NIM), not suggesting that deposits are loaned out dollar-for-dollar. 
2) Relating to that, beyond loan demand and creditworthiness, banks are also constrained by the deposits of thousands or millions of Joe's, average or otherwise, that they are required to hold in the form of reserve requirements, which have become increasingly stringent in recent years.
3) Panic and bank runs have more to do with the risk of losing your deposits entirely due to insolvency, as happened from time-to-time prior to the FDIC and as continues to happen in some countries. But there's no precedence to suggest that negative interest on deposits would lead to bank runs. Obviously, depositors are always free to shop around for the best rate, so banks would need to be very cautious in making such a move and probably would want to phase it in slowly and in-line with competitors, but it's already happened to some degree in Switzerland and appears on the horizon in Sweden. Most people probably can't tell you the interest rate on their banking accounts, except that it's close to zero. Any move into the negative territory would just move to the other side of close to zero. In any case, I think it's very unlikely to happen here, but just pointing out that it wouldn't be as extreme as you suggest if it did.

In regard to #2: Banks are not really constrained by reserve requirements. They can always find reserves after the fact. Cullen Roche over at Pragmatic Capitalism explains this far better than I ever could. I suggest reading some of his papers on the banking system. He's a huge banking nerd but explains things quite well.


Sure, they could, but some bankers would give up their first born before issuing new common equity. And debt, including all hybrid debt, is excluded from CET1.

I don't think common equity would be necessary. They could get reserves from other banks or the Federal Reserve. Here's a brief article on it from Pragmatic Capitalism: http://www.pragcap.com/bank-lending-is-primarily-a-demand-side-issue/

aspiringnomad

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Re: Negative interest rates.
« Reply #38 on: February 15, 2016, 10:38:16 AM »
Today we think of giving money to a bank, which they lend back out as a loan to someone else, and then they pay us interest which is less than what they earn. You get interest, and they get a profit. Everyone is happy.

Think to a situation where there is less lending. Instead of the above happening you might pay the bank to 'protect' your money. You don't want cash sitting at your house. You are paying the bank for the safety of its vault(and now it's FDIC insurance). People with small deposits might still do this. Many banks charge a fee to any customer that has less than X deposits especially if they don't have direct deposit.

So the idea of negative interest rates isn't extreme. If people want their money protected more than other people want loans it is very possible a bank will have way too much in deposits and have to begin charging interest for the 'safety' instead of paying interest. So this could happen without the intervention of a central bank.

Side note: Once you figure in inflation, you are basically always paying the bank to protect your money. ;)

Except that's not really how it works. Banks lend money by creating it out of thin air. Banks are constrained by credit-worthy borrowers and credit demand, not by the average Joe putting in their deposits so the bank can turnaround and lend that money out. The idea of negative interest rates, on a nominal basis of course, to the average Joe and his deposits is quite extreme. If the bank said "We're charging you -1%" for deposits, they run the risk of panic, bank runs, and cash hoarding. Like someone previously mentioned here, cash would probably need to be outlawed before negative interest rates took hold of the average Joe's bank deposits.

1) I think Indexer was just pointing out how traditional commercial banks make money (i.e., NIM), not suggesting that deposits are loaned out dollar-for-dollar. 
2) Relating to that, beyond loan demand and creditworthiness, banks are also constrained by the deposits of thousands or millions of Joe's, average or otherwise, that they are required to hold in the form of reserve requirements, which have become increasingly stringent in recent years.
3) Panic and bank runs have more to do with the risk of losing your deposits entirely due to insolvency, as happened from time-to-time prior to the FDIC and as continues to happen in some countries. But there's no precedence to suggest that negative interest on deposits would lead to bank runs. Obviously, depositors are always free to shop around for the best rate, so banks would need to be very cautious in making such a move and probably would want to phase it in slowly and in-line with competitors, but it's already happened to some degree in Switzerland and appears on the horizon in Sweden. Most people probably can't tell you the interest rate on their banking accounts, except that it's close to zero. Any move into the negative territory would just move to the other side of close to zero. In any case, I think it's very unlikely to happen here, but just pointing out that it wouldn't be as extreme as you suggest if it did.

In regard to #2: Banks are not really constrained by reserve requirements. They can always find reserves after the fact. Cullen Roche over at Pragmatic Capitalism explains this far better than I ever could. I suggest reading some of his papers on the banking system. He's a huge banking nerd but explains things quite well.


Sure, they could, but some bankers would give up their first born before issuing new common equity. And debt, including all hybrid debt, is excluded from CET1.

I don't think common equity would be necessary. They could get reserves from other banks or the Federal Reserve. Here's a brief article on it from Pragmatic Capitalism: http://www.pragcap.com/bank-lending-is-primarily-a-demand-side-issue/

He's taken the kernel of truth that banks can draw on temporary sources of liquidity and spun it to imply that somehow there are no internal constraints to growing its lending portfolio. Reality and regulators suggest otherwise. I actually read the very good article that he refers to and don't agree at all with the conclusions he somehow drew from it. First of all, the article specifically states that currently, systemic reserves are abundant post-crisis, but that does not mean they are theoretically abundant to all banks at all times or even to all banks at this moment of abundant reserves. In fact, one of the first lines in the article is: "The Bank [of England] correctly states that competition for reserves (in the form of deposits and other borrowing) is a constraint upon lending for individual banks..." and later in the article the author points out that "...reserves were not abundant prior to 2008."

The main point of the article is to discuss the challenges in conducting monetary policy at a time in which the system is awash in reserves, not at all to argue that reserves have no bearing on lending. The article goes on to say: "the combined burden of monetary policy as I have described it with macro- and micro-prudential regulation and intrusive supervision is likely to keep the lid on bank lending for some considerable time to come."

It seems Roche either didn't read the article in full or only selectively comprehended it. In any case, banks are certainly constrained by something other than credit-worthy borrowers and credit demand even if popular bloggers claim otherwise.

Bardo

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Re: Negative interest rates.
« Reply #39 on: February 16, 2016, 11:30:37 AM »
The only way you can really enforce negative interest rates ("Account balance based service fees" are more likely in implementation than actually calling it a negative interest rate) is by banning cash in any useful quantities.

Which, of course, is also on the table and keeps getting talked about.  To... "reduce crime."  Or drugs.  Or think of the Children.  Or something.  It does make a black market economy and a "cash economy" harder to do if you can't transmit value between people without the banks and government knowing.


So in an effort to make cash hoarding and transactions less attractive as negative interest rates start becoming implemented, here are proposals to eliminate the 500 euro banknote:
http://www.nytimes.com/2016/02/16/business/international/european-central-bank-weighs-eliminating-500-euro-bill.html?_r=0

and the US $100 banknote:
http://www.marketwatch.com/story/why-larry-summers-wants-to-take-away-the-100-bill-2016-02-16





 

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