Respectfully submitted by Lawrence E. Rafferty (rafflaw)-Guest Blogger
This past week the main stream media made a big deal about the unemployment rate declining to the five-year low of 7%. While it was good news that over 200,000 jobs were added to the economy and that the unemployment rate decreased, the economy and main street are still lagging behind Wall Street. The Federal Reserve has been attempting monetary easing strategies in an effort to stimulate the economy. It may have worked for Wall Street, but the rest of us are still catching up.
“The Federal Reserve is the only central bank with a dual mandate. It is charged not only with maintaining low, stable inflation but with promoting maximum sustainable employment. Yet unemployment remains stubbornly high, despite four years of radical tinkering with interest rates and quantitative easing (creating money on the Fed’s books). After pushing interest rates as low as they can go, the Fed has admitted that it has run out of tools.” Ellen Brown
Now that we have had years of low-interest rates, created by the Fed’s policies what is the next great idea from economists? One economist, Lawrence Summers, who was a candidate to replace Ben Bernanke as Chairman of the Federal Reserve, came up with the big idea that since low-interest rates weren’t enough to bring the economy back and to spur job creation, he thought that negative interest rates would get the job done.
“At an IMF conference on November 8, 2013, former Treasury Secretary Larry Summers suggested that since near-zero interest rates were not adequately promoting people to borrow and spend, it might now be necessary to set interest at below zero. This idea was lauded and expanded upon by other ivory-tower inside-the-box thinkers, including Paul Krugman.
Negative interest would mean that banks would charge the depositor for holding his deposits rather than paying interest on them. Runs on the banks would no doubt follow, but the pundits have a solution for that: move to a cashless society, in which all money would be electronic. “This would make it impossible to hoard cash outside the bank,” wrote Danny Vinik in Business Insider, “allowing the Fed to cut interest rates to below zero, spurring people to spend more.” ‘ Ellen Brown
Yes, you read that right. The big idea that a former Treasury Secretary and Fed Chairman candidate came up with would be to create negative interest which would cost depositors money, and protect the solvency of big banks! That idea must have involved some serious scholastic research on Mr. Summer’s behalf. I am guessing that Wall Street was involved in that idea because it would do little or nothing to help individual citizen depositors or to induce employers to create more jobs.
How would charging depositors for putting their money in the bank spur anyone to spend more? It appears to be nothing more than an attempt to protect large banks from the ups and downs of the economy, while costing individual depositors even more money to have their funds in the bank. And can anyone tell me how this negative interest idea would help spur hiring?
Don’t get me wrong. I agree that we have to think outside of the box to find a way to help Main Street recover fully from the Great Recession. But charging customers money to keep their money in the bank seems ludicrous. The Federal Reserve used to have the authority to loan funds directly to businesses and it seemed to work. Of course, if it works for Main Street, Wall Street and the big banks get nervous. Just what could we do to increase the Fed’s tools in order to actually benefit individuals and increase hiring?
“Bernanke delivered the money to the creditors because that was all the Federal Reserve Act allowed. If the Fed is to fulfill its mandate, it clearly needs more tools; and that means amending the Act. Harvard professor Ken Rogoff, who spoke at the November 2013 IMF conference before Larry Summers, suggested several possibilities; and one was to broaden access to the central bank, allowing anyone to have an ATM at the Fed.
Rajiv Sethi, Barnard/Columbia Professor of Economics, expanded on this idea in a blog titled “The Payments System and Monetary Transmission.” He suggested making the Federal Reserve the repository for all deposit banking. This would make deposit insurance unnecessary; it would eliminate the need to impose higher capital requirements; and it would allow the Fed to implement monetary policy by targeting debtor rather than creditor balance sheets. Instead of returning its profits to the Treasury, the Fed could do a helicopter drop directly into consumer bank accounts, stimulating demand in the consumer economy.” Ellen Brown
As I mentioned above, the Federal Reserve used to have the statutory authority to loan directly to businesses in their respective Districts, but the recent Dodd-Frank reform bill seems to have weakened that authority.
“In 2010, Section 13(3) was modified by the Dodd-Frank bill, which replaced the phrase “individuals, partnerships and corporations” with the vaguer phrase “any program or facility with broad-based eligibility.” As explained in the notes to the bill:
Only Broad-Based Facilities Permitted. Section 13(3) is modified to remove the authority to extend credit to specific individuals, partnerships and corporations. Instead, the Board may authorize credit under section 13(3) only under a program or facility with “broad-based eligibility.”
What programs have “broad-based eligibility” is not clear from a reading of the Section, but it isn’t individuals or local businesses. It also isn’t state and local governments.” Nation of Change
If the Federal Reserve had the authority before Dodd-Frank to bail out individual businesses like AIG with over 1 Trillion dollars in loans, the Fed could have also loaned money directly to businesses and even to State and local governments. Is it more valuable to the economy and to individual citizens to bail out AIG with Fed help, but not bail out Detroit or other cities that are still struggling with austerity programs created by Congress and policies that aided the shipping of jobs overseas?
I highly recommend that you read the entire Ellen Brown article that I have linked above. By allowing the Fed to have the power that it used to have, we might be able to aid individual businesses and maybe even individual taxpayers. I would suggest that giving the Fed revised powers, including some that they had in the past, might allow us to even the playing field between Wall Street and Main Street. Of course, we would also need to stop making it profitable for corporations to steal more jobs from American workers. What ideas do you have?
Do you think returning the power to the Fed to aid businesses and individuals directly would spur the economy? I have my doubts whether Congress would go along with the idea of strengthening the Fed’s tool box knowing their Wall Street owners might not get as much taxpayer money, but I believe it is a fight worth having. What do you think?
Additional Resources: Could the Banksters Grab Your Deposits?
The Failure of Laissez Faire Capitalism and Economic Dissolution of
pdm, I mean Brownie, you’re doing a heck a job here son.
100+ million capable USA workers setting on their thumbs producing next to nothing.
Most every sector of the economy is in complete collapse.
Next to zero percent interest on peoples saving is cheating them out of something like a trillion a year that’s going to Thieves on Wallst/CoLondon…
Keep up the great.
http://www.zerohedge.com/news/2013-12-05/here-growth-inventory-hoarding-accounts-nearly-60-gdp-increase-past-year
“Negative interest would mean that banks would charge the depositor for holding his deposits rather than paying interest on them. Runs on the banks would no doubt follow, but the pundits have a solution for that: move to a cashless society, in which all money would be electronic. ”
There have been remarks about a change to electronic funds and banks charging depositors. But that is not in the offing – it is not what is going to happen.
When mainstream economist talk about negative interest the context is inflation, nominal interest rates and real interest rates.
Nominal interest is the rate paid on an interest bearing account, for example a savings account.
Inflation is the general rise in prices for all the goods and services in the economy over a period of time.
The real interest rate is the difference between the nominal rate of interest and the rate of inflation.
The real interest rate is an important concept because under some economic conditions it seems the real rate of interest is a better explanation – correlates better – for economic activity than any other measure of interest.
And finally under some circumstance the FED does have some control over inflation. The FED definitely has a target for inflation which is currently approximately 2%.
In any case when economists talk of a policy that includes negative interest they are talking about targeting inflation to reduce the real rate of interest.
Nobody is going to gather up all the paper money and hand out EBT cards. It is much easier to manipulate, that is, change the inflation rate.
And there is nothing new about this. The economy occasionally has periods when the rate of inflation is greater than nominal interest rates which is just another way of saying that the real rate of interest is negative – negative interest rates. The late 1970’s and early 1980’s are an example.
As a matter of fact, if I am not mistaken, over the past year or so, ten year treasures, that is treasury bonds with a 10 year maturity date, have paid negative interest – paid nominal interest less than the rate of inflation – several times. In effect bond holders of those securities were paying storage fees on their money.
And, yes negative interest rates cause great unhappiness to those lucky enough to have large amounts of funds in interest bearing accounts.
But the negative interest rates will not arise because of a charge from banks – negative interest rates result from inflation being higher than nominal interest rates.
Good reminder pdm.
Here’s my “Happy Thought” for the day….
Janet Yellen will be Fed chief.
Now everybody (except Bron) say: Thank you, Mr. President!
BFM,
The sole purpose is to destroy the economy of the USA, distroy Capital, drive our govt into bankruptcy & then they can take their fake money & buy up our most valuable private/public assets.
ie; Argentina, Greece, Spain.. Europe, etc.
Go get the easy to read short book by John Perkins: Confessions of an Economic Hitman.
It’s the same ole plan/scam that was run on South/Central America.
But you & the people a supposed to believe the reason this nation is broke is because of your savings of wages, your private pensions, Social Security & heath care expenses.
Yes those programs were all poorly managed & intentionally defraud by Wallst/City of London America hating scum.
“And can anyone tell me how this negative interest idea would help spur hiring? **”
Well, for one, if the rate of return on financial instruments goes down, investment opportunities in plant and equipment might look better and lead to increased orders for capital goods and additional hiring both to manufacture the capital goods and to use the capital goods in production.
This possible alternative would depend on differences in changes in the rate of return for financial instruments and changes in the rate of return in investment in plant and equipment.
“It appears to be nothing more than an attempt to protect large banks from the ups and downs of the economy, while costing individual depositors even more money to have their funds in the bank.”
Every change in nominal interest rates leads to some people being better off and some people being worse off. So long as interest is paid on accounts that is an unavoidable result.
But Considering that banks and their managers also hold interest bearing securities, it does not seem likely that the suggestion is solely an attempt to protect large banks – since it would also cost them.
Ron Paul is the only man for the job. Put him in charge. Everyone to do as he says. Yes, he would abolish the Fed & Income tax & build a more prosperous country. Some of this might need to occur on a gradient.
Rafflaw,
Excellent, I’m glad you wrote this piece.
I’ve been telling everyone it’s a bad decade to quit drinking! 🙂
Is there anyone left that doesn’t understand Wallst/City of London Banks/Insurance co’s have declare open warfare on the people of the USA & our Govt on every level.
**Yes, you read that right. The big idea that a former Treasury Secretary and Fed Chairman candidate came up with would be to create negative interest which would cost depositors money, and protect the solvency of big banks! That idea must have involved some serious scholastic research on Mr. Summer’s behalf. I am guessing that Wall Street was involved in that idea because it would do little or nothing to help individual citizen depositors or to induce employers to create more jobs.
How would charging depositors for putting their money in the bank spur anyone to spend more? It appears to be nothing more than an attempt to protect large banks from the ups and downs of the economy, while costing individual depositors even more money to have their funds in the bank. And can anyone tell me how this negative interest idea would help spur hiring? **
rafflaw,
I had read a couple of online articles that touched on this subject a week or two ago. No names were mentioned at the time.
I think the idea of negative interest rates is beyond absurd. That Larry Summers…what a guy! He helped do in Brooksley Born who had warned about the problem that unregulated derivatives might cause.
*****
The Case Against Larry Summers
By Michael Hirsh
9/12/13
http://www.nationaljournal.com/magazine/the-case-against-larry-summers-20130912
Excerpt:
The Federal Reserve chairman wields such enormous power, with so little accountability, that he or she is said to be the second-most-powerful person in government after the president. Decisions are habitually made in secret. The job requires a person of great personal tact, subtlety, and self-control. It requires someone who knows how to build consensus at the highest levels for the right kind of policies—someone who possesses the maturity and character to admit error and shift course when needed.
But, according to numerous accounts from those who have worked with him, Summers has often displayed the opposite attributes during his long career. Behind the scenes, he has used his power, combined with intellectual arrogance, to bully opponents into silence, even when they have been proved right. He has refused to allow his dissenters a voice at the table and adopted a policy of never admitting errors.
And Summers has made a lot of errors in the past 20 years, despite the eminence of his research. As a government official, he helped author a series of ultimately disastrous or wrongheaded policies, from his big deregulatory moves as a Clinton administration apparatchik to his too-tepid response to the Great Recession as Obama’s chief economic adviser. Summers pushed a stimulus that was too meek, and, along with his chief ally, Treasury Secretary Timothy Geithner, he helped to ensure that millions of desperate mortgage-holders would stay underwater by failing to support a “cramdown” that would have allowed federal bankruptcy judges to have banks reduce mortgage balances, cut interest rates, and lengthen the terms of loans. At the same time, he supported every bailout of financial firms. All of this has left the economy still in the doldrums, five years after Lehman Brothers’ 2008 collapse, and hurt the middle class. Yet in no instance has Summers ever been known to publicly acknowledge a mistake…
FIGHTING WORDS
Nobody who has spent so much time working in government has a perfect record, but Summers has rarely shown enough humility to wonder whether his answer may not be the best one—an attitude that has led him to sideline opponents no matter the merit of their arguments. “As everybody knows, Larry is very smart, and he likes to show it,” Alan Blinder, who served on Clinton’s Council of Economic Advisers and later as Fed vice chair, said in an interview a few years back. And Summers’s policy errors, when he’s made them, have been outright catastrophic.
As deputy Treasury secretary under Robert Rubin in the mid-’90s, he dismissed those experts, such as Blinder and Nobel-winning economist Joseph Stiglitz, who wanted a more cautious opening up of global capital flows; in the years since, these rampaging tides of “hot” capital have caused asset bubbles in one economy after another, with too little institutional restraint on the part of deregulated banks. Summers famously—even brutally—fought efforts to regulate derivatives, which are essentially bets on the rise and fall of asset values and which, escalating into the multiple trillions of dollars, helped to put many financial firms at risk. And early in the Obama administration, he worked hard to marginalize a widely revered former Fed chairman, Paul Volcker, who pushed for greater financial regulation.
Summers helped midwife a major series of policy errors dating back 20 years that led directly to what many economists now believe was the worst financial crisis ever. In particular, Summers’s opponents—he faces a phalanx of opposition among Democrats on the Hill—point to the Commodities Futures Modernization Act of 2000, which effectively deregulated the global market in over-the-counter derivatives and was Summers’s signal achievement as Treasury secretary. The final report of the Financial Crisis Inquiry Commission convened by Congress in 2009 puts the government’s failure to rein in these derivatives at “the center of the storm.”
thanks for the link pdm!
Why is the FONT so LARGE TODAY? The Fed does not really matter. I am not blind.
Great article, Raff!
To Bron, Richard, and Eleazer:
This is not high school. If you feel that we should do away with the Federal Reserve, then feel free to enlighten us with a replacement monetary policy or theory. A one sentence response is an insult to Raff’s (and Ellen’s) article.
pdm,
I have been looking for where Ellen Brown got that information. She is very reputable, but I haven’t found it yet.
Eleazer,
On what evidence do you suggest that the Federal government and the Fed do not want their powers expanded? Or am I misreading your comment. I can understand the political issues, but aren’t important issues worth fighting for?
Raff, nevermind. I found the Krugman blog that addresses the Summer’s remarks. Here is the link:
http://krugman.blogs.nytimes.com/2013/11/16/secular-stagnation-coalmines-bubbles-and-larry-summers/?_r=0
Big subject and I have much to learn before making a judgement so I’ll keep it simple…
if Bron is for it – I’m against it.
Raff: It is not clear to me who is quoting Krugman as supporting the idea of negative interest rates. Can you provide more support that this is Krugman’s position?
Thanks.
Currently completely politically unfeasible. And for good reason. The federal government and the federal reserve do not its powers expanded but contracted.
end it, dont mend it.
Solution? END THE FED!