Negative Interest Rates— Only The Start?
As Ryan McMaken noted on June 5, the European Central Bank has instituted negative interest rates for member banks. This could soon spread to the US and also to consumer accounts. If so, you would find money taken out of your bank account each quarter unless you spend it. Some observers think that in the US at least it will start with higher account fees, which will be stealth negative interest rates, and then move to overtly negative rates.
The idea is that if low rates are not yet persuading you to spend, then why not punish you even more for saving. To make this more effective, there would also be a push for all electronic money, to keep you from stashing any away from the confiscation agents. Ken Rogoff, leading Harvard (and Republican) economist has just recommended this to facilitate negative interest rates and in general to increase government control over cash.
This is far from the only “innovation” that could be coming our way. In a speech on June 4, San Francisco Fed Chairman John Williams suggested that the Fed should at least take a look at “nominal income targeting.” He said this could be “a creative way to bend the curve in terms of macroeconomic and financial stability trade-offs.” What this gobbledegook means is that the Fed would simply create money and then distribute it to parties in danger of bankruptcy and foreclosure.
Isn’t that a great idea? Why stop with the bail-out of big banks when you can bail out anyone who gets in financial trouble? That would guarantee the zombification of the economy that is already well underway. Bad business ideas and badly managed companies would live forever at the expense of good ideas and well managed companies.
Here are some other daft ideas being discussed in central banking and other circles:
1. Take a leaf from Japan by forcing banks to lend in return for Fed support.
2. Hold interest rates down but simultaneously drive inflation up to as much as 5-6%. With real interest rates at negative 5%, borrowing will soar. What isn’t clear in this scenario is why lenders will want to lend, but they can always be forced to do so.
3. Create even more money and use it to buy corporate bonds, stocks, real estate, anything that can be bought, which will flood the economy with money.
Some of the ideas waiting in the wings are not monetary. They include:
4. The government should set an annual borrowing target for the economy. If it isn’t being met by the private sector, government will itself step in and borrow to achieve the target. Who cares how the borrowed money is spent, so long as it is spent?
5. The government should issue bonds that will never be repaid. Not simply replaced with new bonds as at present—never repaid.
6. Employers should have to seek government permission to lay off or fire a worker. This idea of Paul Krugman’s is already true to a large degree in France, with the result that employers are very reluctant to hire anyone.
These days government economic managers are like mad tinkerers. Aldo Leopold said that the first rule of tinkering is that you don’t throw away the parts. But the Keynesian PhDs in charge of our economy are disassembling the economy at too fast a pace to listen.