Doubling Down on Bad Ideas

Uh oh.

Until now, about the only thing good you could say about the Federal Reserve Board in recent years is that it hasn’t followed central banks in Europe and Japan by lowering interest rates below zero.

But that may be where we’re going next.

Fed Vice Chair Stanley Fischer told Bloomberg Surveillance last week that he and his Fed colleagues believe that negative interest rates are a legitimate tool for central bankers to use in their efforts to achieve full employment and economic health.Fischer

If by Fed colleagues, he means his imaginary friends, we should be okay.  But if he means his gal pal Janet Yellen et al, look out below.  Over the cliff we go.

Negative rates would be doubling down on failed policies. If you’re a political figure, like Fed Chair Yellen and her Fed brethren, it would be anathema to admit that you’re wrong about anything, so if something doesn’t work, you rationalize that you just didn’t pour enough gasoline on the fire and you pour more.

Anyone who has to pay for health insurance will recognize the doubling-down approach being used in the coming election by the Democrats who gave us Obamacare. The Affordable Care Act, to the surprise of no one who is not a Democratic member of Congress, has become unaffordable, with a majority of exchanges shutting down because they are losing money. But, with premiums increasing by about 30% this year in some states, Democrats believe the answer is more government control of healthcare. The insurers, of course, are the bad guys, because they are no longer willing to lose billions propping up Obamacare.

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Upending the World

Logic has taken a 180-degree turn, running at full sprint in the opposite direction from where it should be.

As one small example, consider the good fortune of Hans Peter Christensen, recently profiled in The Wall Street Journal, who is currently being paid by his bank to borrow money.  Christensen owns a home in Aalborg, Denmark, where negative interest rates resulted in his bank paying him the equivalent of $38 in interest for the quarter for borrowing money.

Meanwhile, in other countries with negative interest rates, some banks are charging customers for their deposits.  So the bank pays you to take its money and charges you to take your money. Zero Rates

Such is the logic of today’s central bankers in much of Europe and Japan, where rates have been negative for more than a year.

The United States has not adopted negative interest rates—but Fed Chair Janet Yellen said in February that the Fed is studying the feasibility of doing so, “to give the economy an extra boost,” according to The Wall Street Journal.

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Mutually Assured Destruction

Iran, North Korea and the world’s other despots may be able to take over the world without going nuclear or even firing a single shot.

That’s because much of the free world seems bent on destruction from within, done in by a Keynesian death spiral.

Apparently, no one believes in capitalism anymore.  Instead, central bankers, who now control the economy in most of the world, are hell-bent on continuing to dig the negative-interest-rate hole ever deeper, until it is impossible to climb out.

While central bankers have only made matters worse with their easier-than-easy monetary policies, they’re so deeply invested, and so far down the rabbit hole of negative interest rates, they can’t turn back. Draghi

It may not be working, but admitting as much would bruise many strong egos, scare investors and sink stock prices.  So they keep digging.

A Bigger Bazooka

A year ago, Mario Draghi, head of the European Central Bank, announced the start of an asset-purchasing program similar to the Federal Reserve Board’s quantitative easing (QE) program through which the ECB would spend €60 billion a month on Eurozone government bonds.

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Going Negative

“More money cannot cure what too much money created.”

                                   Frank Hollenbeck

There’s nothing positive to say about negative interest rates.

If seven years of zero interest rate policy (ZIRP) has left the U.S. economy is such sad shape, how could negative interest rates help?  Negative rates have already been tried in Europe and Japan, and they have failed to boost the economy.

And yet some believe the Federal Reserve Board is considering replacing ZIRP with NIRP.  We’ve written plenty about the failings of ZIRP, or zero interest rate policy, and believe it would be foolish for the Fed to consider NIRP, or negative interest rate policy.

How does NIRP work?  As Zerohedge explained, “The process can be as simple as the central bank charging its member banks for holding excess reserves, although the same thing can be accomplished by more roundabout methods such as manipulating the reverse repo market.”

In other words, central banks created trillions of dollars in excess reserves throughout the banking system and now they want to charge banks for holding those reserves.  The idea is to coerce banks to lend the money, which should stimulate the economy. 

But if banks aren’t lending much money now, with interest rates near zero, will they lend money when interest rates dip below zero?  Will they reduce their cost of excess reserves by loosening their lending standards, which would likely increase bad loans, or will they pass the costs on to customers?

Loosening lending standards, you may recall, was what caused the last financial crisis, when banks were providing mortgages to anyone with a pulse.  And passing costs on to customers won’t be easy.  Bank customers have historically received a small amount of interest for putting their savings in a bank.  They’re not likel

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