Thursday, November 21, 2013

Mark Gongloff — Larry Summers' Desperate Depression-Fighting Idea May Soon Be Reality

If you think people who save money are being punished by low interest rates, wait until they have to deal with negative interest rates.
Slashing rates well below zero to make it painful not to spend money is the desperate approach to avoiding an economic depression recently endorsed by Larry Summers, President Obama's former top economic advisor and one-time pick to run the Federal Reserve. With economic growth likely to be weak for the next infinity, the job market stubbornly awful and inflation disappearing, central bankers around the world have been toying with the idea for a while. Every day it gets closer to being a reality.
The European Central Bank is considering making European banks pay 0.1 percent interest on the cash they store at the ECB for safekeeping, Bloomberg reported on Wednesday. This would be a watershed moment in central banking, moving from the Federal Reserve's once-radical zero interest rate policy (ZIRP) into the unexplored territory of negative interest rate policy (NIRP).
Meanwhile, across the pond, St. Louis Federal Reserve President James Bullard told Bloomberg TV he thought the Fed should consider making U.S. banks pay money to park cash, too. He's been saying this for more than a year, but the idea is slowly gaining more credence.
The Huffington Post
Larry Summers' Desperate Depression-Fighting Idea May Soon Be Reality
Mark Gongloff
(h/t Charles Haydn at FB)

Wagging the dog's tail to make him happy. This is tightening rather than loosening, since it effectively imposes a tax on banks.

9 comments:

Ralph Musgrave said...

0.1% is irrelevant. A full 1.0% might have an effect.

Why don’t these morons just print fiat and spend it on roads, education, healthcare, etc.? And if want more private rather than public spending, then boost household incomes via tax cuts and/or benefit increases.

Oh I just remembered the reason: the latter policy would increase the deficit, and when any politician hears the word deficit, they tremble at the knees, go apoplectic and take a mouthful of Valium. Be nice if they studied economics instead, preferably MMT.

F. Beard said...

Of course the banks should have to pay for the risk-free storage of the fiat they control!

But in truth, the ONLY fiat the banks should control is that backing entirely voluntary deposits, not the entire population's because we have no other realistic option.

The rest of US, up to normal household limits, should be able to store and transact with fiat risk-free FOR FREE! THAT is a normal duty of a monetarily sovereign government or at least should be. And government deposit insurance for the banks should be repealed.

But as for the banks, businesses and money hoarders, let them pay ALL the costs associated with the government's fiat storage and transaction service since they are the ones who profit off it.

y said...

F.Beard,

this might interest you. It's similar to the sort of thing you've been talking about:

http://rajivsethi.blogspot.co.uk/2013/11/the-payments-system-and-monetary.html

F. Beard said...

y,

Thanks for that link. I agree with a lot of it EXCEPT the FED should be abolished. Instead, let all US fiat users have an account at the US Treasury and the Treasury should make no loans (nor ever borrow) nor pay any interest and those accounts should be free up to normal household services. The large account holders, including the banks, should pay all of the costs associated with the US Treasury's service and Post Offices can serve as branch locations.

As for the banks, if we need them at all (since they are in effect gambling institutions), they should be 100% private with NO government privileges.

We need to kill government backing for banks DEAD or the banks will arise to plague us or our children again and again until we do.

Thanks again for the link.

But it's nice to see that at least SOME elements of ethical money creation are gaining traction.

y said...

leave a comment at Sethi's blog. The account at the Treasury rather than the Fed idea is interesting. Turns the concept on its head a bit.

y said...

also mark Thoma's blog:

http://economistsview.typepad.com/economistsview/2013/11/the-payments-system-and-monetary-transmission.html

The fact that Ken Rogoff put this sort of idea forward at a big IMF event is pretty significant. He's a big cheese in the econ world. It may go nowhere as yet, but you never know.

Ryan Harris said...
This comment has been removed by the author.
Ryan Harris said...

I don't understand why the Fed economists, when they prepare their reports for congress, do not guide congress, give a range for the size of fiscal deficit they expect to exist in order to achieve their GDP and Unemployment targets.

If they start making the deficit targets explicit and point out the effectiveness of fiscal as a tool, it gives the politicians cover when they go back to their voters. They can say hey, the economists told us to do it, it is why you've a job mister voter man.

The Rombach Report said...

Hmmnnn..... Put money into a savings account and get less of it back at maturity. Seems like the very definition of deflation. By requiring banks to pay 0.1% to keep reserves parked O/N, the Fed would in effect be targeting deflation at that rate. Coincidentally, headline CPI inflation data released earlier this week dipped -0.1% in October after rising 0.2% in September.