My jaded view would be that the banks would just borrow free money, but not pass anything onto the consumers, instead using it for more high risk trading. Seems to me that the government has a much better way to stimulate the economy: lower rates on existing student loans. If the Fed can afford to give negative rates to the banks, shouldn't it follow that the DoE can afford to give negative rates to students?
> Seems to me that the government has a much better way to stimulate the economy
The government has many better ways to stimulate the economy through fiscal policy, but that requires action by Congress, which isn't interested.
The independent central bank, the Federal Reserve ("the Fed"), has its mandates from the government with regard to the economy, and a sharply limited set of monetary policy tools with which to pursue them.
> If the Fed can afford to give negative rates to the banks, shouldn't it follow that the DoE can afford to give negative rates to students?
No, because the Fed issues the currency, and DoE doesn't. That makes what each can afford very different.
More importantly, aside from the issue of what they can afford, the Fed makes its own decisions on interest rates, DoE's decisions are made by Congress. Decisionmakers at the Fed have different priorities and preferences than those in Congress.
The Fed could buy up refinanced student loan paper in a similar manner to how it's been artificially decreasing the cost of borrowing to buy real estate by accumulating almost 2 trillion dollars worth of MBS paper. That would increase the demand for refinanced student loans and drive down the rates.
Oh wow, you cannot fathom how much I love this notion.
If the Fed started buying up Student Loan Paper at even half the rate of the MBS program - let's go with $30 billion a month - I would probably faint out of disbelief because that action might actually benefit the economic engine of the United States.
I'm not sure I understand. It's not like the Fed would just buy the loans and retire them. People would still be on the hook to pay them off. All that does is let the banks get theirs now instead of having to write a good loan and wait for it.
First, most new loans are made by the federal government. A lot of people that graduated with their last degree a while back remember the FFEL system+ and think that's how it still works, but it doesn't anymore. There's some private loans, but it is a small part of new origination and has been for years. So if any entity would be "getting theirs now" would mostly be the federal government.
Second, loans are principle and interest. Some people are still paying off loans made by the federal government with an interest rate of 8.5% (PLUS graduate loans from 7/1/06–6/30/10). Other loan programs or origination times are lower, but still fairly high.
There's a private market to refinance these high interest rate loans at a lower rate, but it still pretty small and selective. If the Fed were to buy repackaged refinanced loans it would tend to increase demand and capacity by companies to refinance loans and thus decrease the average interest rate paid and the number of loans refinanced.
The same thing has happened (and is still happening) in residential real estate. The Fed isn't forgiving anyone's mortgage or writing any new mortgages, but by buying up enormous amounts of repackaged mortgage debt it is driving private companies to seek out mortgage debt to repackage and thus lowering mortgage rates. That was the entire point of the exercise.
+Under FFEL loans were made by private companies but guaranteed by the federal government. Many of those loans could be refinanced without losing the government guarantee.
Honestly, this doesn't read like a stimulus plan for the economy, but more like a plan to specifically help a demographic that's well-represented on Hacker News.
Mortgages are closely linked to a lot of ongoing economic activity, and homes and home-related activities make up a large part of the economy. I don't think student loans have the same place.
The average student loan debt is about ~29k [1], which is about as much as a good car. Someone with a good job should be able to handle that kind of debt without help.
If the Fed is going to do stimulus, it should focus on stimulus that gets those indebted college grads and people without student debt better jobs, rather than getting those grads a little more spending money in their current crappy jobs.
It would ease debt servicing for existing student debt holders, creating consumer excess (just as lowering rates for mortgages creates a wave of refis, which puts more disposable income in America's consumer pockets).
The key would be for the Fed to restrict its activities to existing student debt, to prevent pushing down rates on new originations.
Student loan rates are set by Congress, and student loan consolidation does not generate a bonus at closing. As a result, there's no direct consumer surpluses to be gained by having a separate owner of student debt. At best, the Fed buying student loans would benefit Sallie Mae/Navient, because the Fed's purchase price would have to be higher than their preferred holding price.
The only incentive that will effectively cause companies to pay their employees better is more demand for labor, which is most likely to be caused by increased economic growth. Most other programs end up being more complicated and costly than earned income tax credits and other methods of redistribution.
> The only incentive that will effectively cause companies to pay their employees better is more demand for labor
Or wage regulations (increasing the minimum wage)
Or labor organization (ie Germany)
Or tax regulations (shift tax incentives from machinery to labor)
> which is most likely to be caused by increased economic growth.
Growth is over my friend, at least the growth that would be necessary for wage inflation (ie Japan). EDIT: We can argue this point if you'd like, in a thread about the strongest world economy planning for negative interest rates, while other central banks have already gone (and continue to hold) at negative rates (can't "push the string"!, ie stoke demand with free money).
>"Or wage regulations (increasing the minimum wage)"
Evidence on this is mixed at least; the majority of the studies go against this being an effective policy. The Card and Krueger findings are somewhat convincing, but do not hold over a longer period of analysis.
>"Or labor organization (ie Germany)"
Labor organization may help transfer wealth from shareholders, suppliers, or consumers to the workers, unless it kills the host companies or causes them to move away. I have not seen evidence that labor organization helps the average citizen, though there is some evidence that it may help the unionized people; unless labor organization improves productivity, it can only change distribution, and I'm not sure who it really transfers wealth from.
>"Or tax regulations (shift tax incentives from machinery to labor)"
This may help raise demand for labor, but pay can never go higher than productivity, which usually requires capital investments.
>"Growth is over my friend, at least the growth that would be necessary for wage inflation (ie Japan)."
I disagree, and it is difficult (if not impossible) to prove which of us is right.
> Labor organization may help transfer wealth from shareholders, suppliers, or consumers to the workers, unless it kills the host companies or causes them to move away.
This is by design. If we can transfer more wealth to workers instead of shareholders, we should. If workers can't receive an appropriate wage from a company, than the business is most likely not viable (see: people complaining their business won't work with a $15/hour minimum wage).
>"Growth is over my friend, at least the growth that would be necessary for wage inflation (ie Japan)."
> I disagree, and it is difficult (if not impossible) to prove which of us is right.
I agree that this will be determined by India, China, and to a lesser extent Africa. I believe these economies are growth-limited now, due to the fundamentals around how their economies are structured.
note: I removed a quote child comment responded to, referenced below.
>" If we can transfer more wealth to workers instead of shareholders, we should."
This is a normative goal, but you are assuming that unions always transfer wealth from shareholders to workers, and I am not convinced of this. Shareholders will refuse to invest if the returns are not attractive, so it is difficult to retain them. It seems more likely that unions will transfer wealth from consumers or suppliers to the union members, which is a much less appealing prospect.
>"Can you explain the rational as to how zero interest rate policies can stoke demand on-par with middle class consumers, versus simply enriching lending institutions? If I'm wrong, I am happy to concede the point."
I'm not convinced that the Federal Reserve has much impact on consumer and corporate interest rates. All central banks believe that international bond markets are relatively free. All central banks also believe that they control their national interest rates. These beliefs are not compatible.
note: the second quote in this post was edited out of the parent
>"Also, if monetary policy is driving rates negative, technically, capital "required" for productivity is literally free."
This is only superficially true. Real interest rates also take inflation risk and investment risk into account, so they could easily be quite signiifcant even when the central bank says there is a negative interest rate.
I am not an economist but I am pretty sure you could design tax policies that make it more attractive to pay higher salaries for the average worker or maybe give them shares in the company.
Can you imagine how much demand there would be if average wage growth would have kept up with productivity? People who make 30000/year would spend much more if they had 40000/year. I don't think a CEO's behavior will change much if he has 30 million or 40 million.
Obviously this won't happen but it's a thought that should be brought up from time to time.
>"Can you imagine how much demand there would be if average wage growth would have kept up with productivity? People who make 30000/year would spend much more if they had 40000/year. I don't think a CEO's behavior will change much if he has 30 million or 40 million."
There might be more demand for the consumer goods popular for low-middle income citizens, but then again, this could reduce capital investments and reduce productivity in the long term, thus reducing wage growth in the future. I suppose my answer is that I can't imagine how much 'demand' there would be if average wage growth kept up with productivity, largely because the economy is a complicated beast, and 'demand' is not a simple thing.
I am assuming that we hold M2 velocity of money constant for the purpose of this analysis; which is to say that I assume richer people and poorer people hold on to money for the same amount of time before re-allocating it (to stocks, bonds, consumables, durable goods, etc.). If this assumption is true, both will create the same total 'demand', but for different goods. Richer people tend to spend much less (as a proportion of their income) on consumables and personal items than poorer people; the rich also tend to invest the vast majority of their money, and that money often goes to capital investments.
Supply and demand works the same for industrial buildings, robots, software, and trains as it does for homes, couches, and cars. The primary (economic) difference between these goods is their impact on long-term productivity.
>I am assuming that we hold M2 velocity of money constant for the purpose of this analysis
Poor people have to spend money on essentials as soon as it comes in. Rich people don't. That's pretty much the simplest possible definition of being poor. So that is not a valid assumption.
>If this assumption is true, both will create the same total 'demand', but for different goods.
This can't possibly be true either. Rich people spend money on essentials and on luxury goods and on investments and keep some spare cash on hand, because why not?
Poor people spend money on essentials, and perhaps a little distraction and entertainment.
Why would the total demand from both somehow be the same?
> The primary (economic) difference between these goods is their impact on long-term productivity.
Which is the crux of the problem - speculative casino "investment", which is based on gaming markets, isn't economically productive. Neither is an economy that leans heavily on usury.
Productive investment in R&D, small business development, and wage growth stimulates economic capacity and increases confidence.
Speculative investment - including speculative gambling, systems of forced debt like student loans and payday lending, and asset inflation which drives up rents and property prices - destroys demand and economic capacity.
The fact that we're even discussing negative interest rates while in the middle of severe commodity deflation proves the core problem hasn't been addressed.
>"Poor people have to spend money on essentials as soon as it comes in. Rich people don't. That's pretty much the simplest possible definition of being poor. So that is not a valid assumption."
Rich people invest money in capital goods as soon as it comes in, either through a direct purchase, or because the investment bank where they hold the money gives it to someone who spends it.
>"This can't possibly be true either. Rich people spend money on essentials and on luxury goods and on investments and keep some spare cash on hand, because why not?"
I said 'as a proportion of income'; rich people spend far less on living expenses than the poor do as a proportion of income. They might have a car that is 10x as expensive, but with 100x the income to pay for it.
>"Poor people spend money on essentials, and perhaps a little distraction and entertainment."
This agrees with my previous statement.
>>"If this assumption is true, both will create the same total 'demand', but for different goods."
> I am assuming that we hold M2 velocity of money constant for the purpose of this analysis; which is to say that I assume richer people and poorer people hold on to money for the same amount of time before re-allocating it
There are two problems with that: the most obvious is that differences in velocity at the first level is one of the main bases on which distribution differences are held to effect demand growth, so you are just assuming away the main issue.
The second is even assuming away velocity differences at the first step, you also have to assume that velocity is the same in the different markets to which the rich and poor allocate funds: even if velocity were the same in the first case, this assumption would be invalid. (In both the first instances and later steps, this is even more true when you are considering growth of the domestic economy, where you aren't just concerned with velocity at each step, but also the propensity to spend within the domestic economy.)
>"There are two problems with that: the most obvious is that differences in velocity at the first level is one of the main bases on which distribution differences are held to effect demand growth, so you are just assuming away the main issue."
Demand growth for what? CNC machines and tools, or LCD televisions? Making a capital investment in semiconductor fabs will affect production and inspection equipment demand, as well as driving down production costs for a wide variety of goods, whereas buying an LCD television will increase demand for TFT screens, backlights, and slightly increase demand for television production machinery. I am making an assumption because we have to. No one has ever make a comprehensive economy-wide microeconomic model that worked, and no one ever will; this is the essence of the calculation problem.
>"The second is even assuming away velocity differences at the first step, you also have to assume that velocity is the same in the different markets to which the rich and poor allocate funds: even if velocity were the same in the first case, this assumption would be invalid. (In both the first instances and later steps, this is even more true when you are considering growth of the domestic economy, where you aren't just concerned with velocity at each step, but also the propensity to spend within the domestic economy.)"
I agree that there is probably a difference between velocity of spending between rich and poor, but I'm not sure which one is faster (; please provide a link to such information if you have it). It seems likely that the poor spend more money on low cost foreign imports (stuff made in China) than rich people who are investing in very expensive specialty goods made in the West, so I think it likely that allocating more money to the rich is beneficial from a mercantilist point of view.
You might be living paycheck-to-paycheque, yet still take the same time to allocate money as someone much more well-off. A full time investment management staff can allocate money quite quickly, and tend to plan ahead (thus avoiding delays). Being 'leveraged' does not hasten allocation of funds, it affects how the money is used.
Well, there is a pretty large existing population of college grads who cannot afford to spend much because of the existing debt. Most proposed regulation (that I think has no chance of passing) talks about new loans. Immediately lowering rates on existing loans would actually give millennial more spending money.
As for tuition skyrocketing, I think that will slow down or even reverse soon. Colleges thought that they could raise rates now, and expect the economy to catch up with higher salaries later. That didn't happen. In fact the opposite happened: the economy tanked, and a bunch of people were left with lots of debt and jobs that can't support it. I think the market will correct itself, especially as online/remote education becomes more prevalent, state schools show that your earning potential is not really linked to the prestige of your school's name anymore, etc.
I disagree, I think the desperation for jobs will increase demand on colleges and universities and the availability of student loans make that possible. Colleges have been able to, and will continue to, charge whatever students can be loaned.
The student loan problem is one of the most challenging problems.
My undergrad is probably thought by most on HN to be a diploma mill (UCF) - University of Central Florida. But, UCF has done something really special. They said screw it and they worked really hard to keep tuition low. The median Tuition is just $6,368. That low tuition + easy Florida scholarship money has worked well for the University as the acceptance rate has fallen below 50% (That is comparable to many universities in the top 100 globally).
I think UCF's bet that they need to compete on price is going to work in their favor. The biggest downside is massive class sizes, but that is made up for with more online learning and better lecturers.
When someone asks me where I would go, I tell them pick one: Really, really prestigious or cheap and decent. UCF does not provide the opportunities that Harvard does, but it will still beat out an unknown liberal arts college charging $200,000 for 4 years.
> I tell them pick one: Really, really prestigious or cheap and decent
In reality, there is really only one criterion: affordable.
The really elite universities will make themselves affordable if you can get in, and if you can't then you're better off going somewhere cheap. There's no point in paying for the expensive middle.
Hopefully, this will do more to eliminate degrees as a (useless) hiring signal.
There are multiple definitions. No one thinks UCF is illegitimate, but it is a large university which pumps out a ton of students and some people here question any school which isn't a top ten university.
I would say that's what's happening right now and it can't last much longer. Eventually people will realize the debt isn't worth it and universities will be contract.
The problem is when you have a flooded labor market any education becomes a differentiator. So whether the debt is or isn't worth it becomes a question of whether or not you want a middle-class job.
So unlike every other service colleges are special and the more people looking to do it the more expensive it is.
It isn't possible to open more colleges and create competition. That wouldn't work in this case, because as stated unlike every other good or service in the world colleges are special and don't work like that.
Glad we cleared that up, now we can just do nothing about the problem.
It's not just special, there are social pressures that totally distort rational thinking. People (parents, teachers, advisors) tell kids to go to the best school they can. There is a ton of hype about attending the "Right school for you" etc. There are rankings and all sorts of other stuff.
Schools distort true cost through murky financial aid processes. Then the gov't continues the scam by calling loans "financial aid."
Plus the customers are 17 year olds whose most expensive purchase before this was saving up for that really cool concert that one time. And now they are borrowing tens of thousands (sometimes hundreds).
It's also impossible to judge the worth of college.
It's just a mess. We shouldn't be giving kids and young adults that much rope to hang themselves with.
The government should institute price controls for anyone using federal loans. 30k tuition is a total scam.
I don't think we disagree in principle, but in detail.
I fundamentally disagree that
"Schools distort true cost through murky financial aid processes. Then the gov't continues the scam by calling loans "financial aid.""
That argument says that there is essentially free money just by charging more, no increase in services. If that where true the amount of money to be made would force more colleges to be opened.
Couple that with the fact that public colleges are much cheaper than their private counterparts and community colleges are cheaper still and I don't know exactly where this argument comes from.
There is a lot of high cost options which loans unfortunately do cover, but to blame the price distortion on the availability of the loans seems backward.
Private K-12 schools are just as outrageously priced with no loans available to fund them.
I think there is a stigma (depending on your area maybe justified) around public educational institutions, which allows profiteers to do their thing.
Instead of fixing the underlying problem, we throw money at it. Which is the American way.
> So unlike every other service colleges are special and the more people looking to do it the more expensive it is.
Uh, what? Are you being sarcastic?
Because it's pretty much a basic rule of economics that if demand for a good increases its price will increase (at least until new supply is introduced).
s/millenial/millenials that have not yet paid off their student loans/
It would have been fun to galavant around Europe for fun instead of paying off my loans, but I guess I'm the sucker for being responsible.
I'm totally fine with people being able to refinance their loans to market rates, if those rates happen to be negative then good for them. I'm annoyed by this prevailing view that everyone with student loans are unemployed and can't pay them back. I know plenty of people with lots houses, cars, and taking vacations that haven't paid off their student loans yet. Outstanding balance left is not a good measure of the loan's burden or the circumstances under which the student took out the loan.
I think it's safe to say that people are generally irresponsible, all things considered.
As for how to handle the mountain of student loan debt -- inflation used to work as a soft form of debt relief but banks screw with people by jacking up private student loan interest rates in lockstep. We need something stronger -- actual debt relief.
Insisting that we need debt relief is not an argument. It's not self evident to me why we need to invalidate principal on loans. I like the idea of inflation a hell of a lot more because it benefits me as someone that paid off my loans ($80k!) in full. We can't seem to do it via monetary policy, but if you give me the choice between helicopter money and student loan debt relief, I'm going with helicopter money every time.
I think you are onto something but lowering student loan rates would probably just cause even higher tuition.
How about lowered student loan rates with an inflation adjusted cap? Then perhaps schools would be motivated to increase the number of students educated, as opposed to getting more money out of each student.
They are, because their state funding is increasing at a lower rate than inflation, and because they have to pay for new buildings and equipment to support growing student populations.
And contrary to right-wing pundits, growing student populations are not a problem, they are the stated goal of public universities. You can't just raise tuition to discourage people from applying because the entire point is to get as many applicants as possible.
> If the Fed can afford to give negative rates to the banks, shouldn't it follow that the DoE can afford to give negative rates to students?
Nope. The Fed is independent of the government and, most importantly, does not answer to Congress. So it can adopt measures to attempt to stimulate and improve the economy which Republicans would surely block if given the opportunity.
The DoE, however, is an executive agency and has its budget determined by Congress. Changing the interest rates would require an act of Congress.
Well, Yellen recently said something along the lines of 'being part of the team' and Bernanke claimed something similar in his book or talks iirc ( sorry, no references atm ).
The whole independent claim is just smoke and mirrors.
> The whole independent claim is just smoke and mirrors.
No, its actually legally substantive (though its more independent within the government than independent of the government.) Within its scope of granted authority, the Fed can (and does, regularly) act independently of the President and Congress. OTOH, actions outside of the Fed's legal powers require actions by Congress and/or the Executive Branch.
Now, certainly, the Fed, the President, and the Congress all interact and share their opinions, preferences, etc.
The specific truth is that the Fed has fewer constraints on its policy decisions than the Dept. of Education does.
The Dept. of Education's policy decisions are tightly constrained by Congress. If there's a law on the books giving the DoE freedom to determine student loan interest rates, then they can. I don't think such a law exists, though, so the Congress would need to pass one.
The Fed was created by Congress, and has a multi-part mission that it must meet, which has been set by Congress. But beyond that, it has great freedom to determine how to meet that mission on a day-to-day basis.
The Fed is part of the federal government, though. It even has its own federal police force.
Strictly speaking, it's not independent of "the government" so they do feel like part of the government. Certainly they feel like "part of the team" when it comes to governance.
However, the Fed often dramatically disagrees with Congress and/or the President when it comes to the best ways of fulfilling their shared values. Witness the consistent complaints from Congress over Fed policies like QE.
> The whole independent claim is just smoke and mirrors.
It's a lot more than that and has a legal basis. If the Fed weren't legally independent, I'm quite sure that Congress would have forced it to adopt different policies than it has.
It seems in my uneducated opinion like the whole system would rely heavily on "you scratch my back, I'll scratch yours". Anyone more knowledgeable have insight into that?
The Fed is nominally independent of the government. Ideally they should be working together with the government providing more stimulus and jobs to bridge an economic slump (also doing something about student loans, as you mentioned). Unfortunately government policy is driven as much by fear and ideology as by rationality, so we are mostly limited to what the Fed can do by setting interest rates.
Though it carries some tinfoil hat like connotations, I'd say the Fed is almost more independent of the US government than Goldman Sachs (& Wall St. in general), which should be scary on an entirely different level.
> but not pass anything onto the consumers, instead using it for more high risk trading
The economy was destroyed by passing it onto the consumers through subprime lending (and a bunch of other things - not trying to assign fault for the subprime crisis here), so high risk trading is not mutually exclusive to passing it onto consumers.
The economy was destroyed by (a) fraudulently selling subprime mortgages as mostly AAA-rated, and (b) default credit swaps, which totaled a lot more than the mortgages themselves. I don't see your point.
Point a) is actually heavily contended. Fraud is not estimated by any credible economist to have had a major (>5%) impact on the financial crisis. In a market situation there is always a disagreement about whether or not a security is worth what it is worth, hence the sale taking place (both sides think they are getting a good deal). There was disagreement about AAA securities of course, but it's very unclear if that is due to market valuing stuff differently or outright fraud. The contents of the loans were not lied about, whether or not they were AAA was not lied about, whether or not they should've been AAA is up for contention.
I don't see your point with b) at all.
If you're a bank it's not like there are a ton of avenues for you to invest your money, and outside of mortgages there aren't a lot of ways to pass the money onto consumers. So if what you want is the bank to pass its new found money onto consumers that's the avenue you want. Unfortunately the last time we did that a lot of unqualified people got loans. So my point is it's tricky.
The economy was destroyed by inflation of a particular asset class driven in part by irrational beliefs about that asset class (housing) [1], misunderstanding of large scale risk [2], fraud in the market from players on all sides [3], and deployment of financial instruments which pushed a huge amount of money into the market [4].
Many actions made the lending crisis worse, but it would not have come about without the huge pool of money that went looking for debt. [5]
The point is, it's really easy to make things worse rather than better with a huge amount of money.
I believe there is a misconception on this. The interest rate is payed BY the government to the holders of the treasury security.
This is loan the government takes to pay for its expenses. The interest rate the government pays on these securities is determined by the FED, and it is one powerful weapon to regulate an economy. The government is the lowest risk debtor in a country, so anybody who wants borrow must pay more than what the government does. If the FED raises the rate, the rest of the economy follows, financing goods and investing get harder, but inflation tends to recede. The opposite happens when the rate is lowered.
If the government pays negative rates on its securities, the banks have to pay TO the government in order to keep money invested in securities. The effect is that the government's debt will decrease, money will flood the market, possibly resulting in a bit of inflation, but maybe kickstarting the economy (and your student loan rates might get lower, if they are not regulated and/or subsidized, which I'm not of sure since I don't live in the US).
>My jaded view would be that the banks would just borrow free money
I'm not entirely sure that is how it would work. They use Denmark as an example, but I believe that the negative interest here was for deposits in "National Banken"/treasury bonds. Meaning that the banks can't just park their money with the state, at least not without incurring a lose.
Some still bought Danish treasury bonds, because at least the lose would be predictable and with no real risk.
It forces the banks to actually do something with what ever money they have, but you're right in as so fare that the customers aren't going to benefit. Most likely the money will just be placed in stock or treasury bond of other stable countries.
> My jaded view would be that the banks would just borrow free money, but not pass anything onto the consumers, instead using it for more high risk trading.
Regulatory changes following the financial crisis make it harder [1] for banks to engage in proprietary trading and pose stricter limits [2] on how much risk they can take on.
Here in New Zealand, we have interest free student loans. There are minimum repayments (as a percentage of income), and the loan is no longer interest free if you go overseas for more than 6 months of the year.
Since inflation is a given, student loans are effectively negative interest over time.
It also means that if you graduate, and can't find a high paying job, you're not crippled by interest payments (there's also a minimum income threshold).
> Seems to me that the government has a much better way to stimulate the economy: lower rates on existing student loans.
I agree about the banks, but how stimulating would lowering rates on student loads really be, though? While students overburdened by debt get a lot of press, it seems like too small of a demographic to help much. I think we'd get more bang for the buck with programs that target lower skilled and unemployed people.
> One thing to keep in mind, they're young. If they save the extra money, they've got a loooong time for compound interest to work on those dollars.
But isn't that the exact opposite of what you want to happen? It you want to stimulate the economy, you want people to spend more money now. College graduates taking the money they save from reduced loan payments and putting it in a 401k doesn't do that, but giving a formerly unemployed person a job so they can buy new clothes and a car does.
As much as I'm a fan of education, I'd think we'd want to do more infrastructure funding. Spending money that we are GOING TO HAVE TO SPEND makes sense when it is "cheap" money, no?
But, as another commenter said, that'd require Congressional action, which doesn't seem to be happening anytime soon.
Not sure where I read this, but aren't the banks pretty much doing that right now? Picking up the credit and buying T-bills with it? Good for banks, the Fed gets to say it's stimulating the economy, somebody is buying the debt, and so on?
Not sure if they are. I remember when the Fed lowered their rates to their current level, someone theorized that it would be profitable, but I have no idea if they are actually doing this.
For a good read on why this Keynesian push toward consumption is misguided, check out this 2005 article[1]. The counterargument against consumption as the driver of the economy states that saving and investment actually leads to growth. The thesis of the linked article is that a huge amount of business investment is hidden from GDP numbers since it falls under "net investment," with two very large sums (business income & business investment) netting out to a small number. When we ignore the huge amount of business investment and focus only on the net, we miss its importance.
Negative interest rates are simply the latest contortion of the Keynesians that will fail to produce the desired results yet again.
I know I'm just a lowly programmer and engineer who shouldn't opine about economics very much, but I observe simply this: The "stimulus" didn't work. I find arguments about how it wasn't big enough to be null, because it isn't clear that we could have afforded much more and if the only way this stimulus works is to spend more than is possible, that is just a way of saying "it doesn't work" that saves some face but doesn't change anything about the practicality.
It's been 8 years now we've been on this policy. Nobody 8 years ago would have predicted what happened. From a scientific perspective, what you do with theories that fail to correctly predict future occurrences is simple.
But our elites really like what quasi-Keynesianism tells them, so the rest of us can continue to live impoverished lives for their benefit.
"Internet economics" and the discussion is full of fringe theories that refer to mises.org. For them every mainstream economist is Keynesian. Even if they belong to Chicago school.
A couple trillion dollars was used to buy up securities that are realistically worth $0 in pretty much every timeframe for 100 cents on the dollar, cleaning up bank balance sheets. This allowed them to continue to speculate on all sorts of things, like housing, commodities, etc, looking for returns (some of it probably saw its way to silicon valley too). It was passed on as easy money to corporations, who mostly used it to do stock buy backs that pretty much do nothing for "the economy" while lifting the stock market.
As for employment, if you actually look at the numbers, its people over 55 who can't afford to retire doing service jobs. The participation rate is trash and young people are fucked.
> A couple trillion dollars was used to buy up securities that are realistically worth $0 in pretty much every timeframe for 100 cents on the dollar, cleaning up bank balance sheets.
I have no idea what you're referring to, but if it's TARP then that's totally false. The government made a profit on the bailout.
The vast majority of the securities which the government bought up had intrinsic values higher than what the fear-driven market was pricing them at.
I don't think anyone thinks the assets bought in QE were worth $0. The Fed's impact was entirely at the margin (increasing the supply of investable dollars).
If the assets bought under QE were sold for 50 cents on the dollar (for example), even the most bearish investors would be lining up to buy in droves. Of course, that applies to investors with actual money behind their beliefs rather than random internet commentators who can pull valuations out of nowhere.
For me, the question of whether it worked is scientific. Did the people who proposed the stimulus correctly predict the future results of it?
No. Nobody predicted our current economy, and the prediction's accurancy get even worse if we're about to slide into another recession in the next six months.
Of course you can argue that what we did was better than some hypothetical. That's so easy that it's not even an argument, which is why I don't consider it. What I observe is that the economy did not react as expected, we have not recovered anywhere near as much as predicted, interest rates are still being held low and we're talking about them going negative (again, I recall no predictions that such measures would be necessary seven+ years later), and a wide variety of indicators that were supposed to turn positive never have, or just barely have, shortly before what is very likely a recession.
The theories aren't working. Their predictions don't come true. Given that the theories don't work, it is scientifically foolish to then use those theories to themselves predict what couldhave shouldhave happened if some other course of action was taken, since the theories are already visibly nonfunctional. It is circular logic to use the broken theories to predict that the broken theories told us the right thing to do. This probably goes a long ways towards explaining why economics is still the "dismal science". (Though, to be sort of fair, economics does not have a lock on that error.) I don't have to have a better theory to say that; I need only have predictions in my hand and their failure to come true.
Yes, it worked. The stock market is back up, and employment numbers "look good" (I mean a lot of that is workers getting discouraged, but still, the fed has achieved its mandate).
But how long will the stock market still be up, and why is it that over the course of those years the rich have gotten richer and the poor have gotten poorer? Don't suppose it had anything to do with directly redistributing money upwards?
look at real median personal income - it's still way down. During recessions, households tend to consolidate for savings purposes... If your argument depends on "people are struggling and aggregating to survive at the lowest levels of maslow's hierarchy" then fine.
The stimulus did exactly what it was supposed to do: prevent a prolonged recession and return the economy to growth.
> Nobody 8 years ago would have predicted what happened.
If you had taken a poll of Keynesian economists on the likely impact of the policies (a modest fiscal stimulus together with expansionary monetary policy), I'm pretty sure most of them would have predicted exactly what we got: a mild recovery coupled with strong asset growth.
This idiotic notion that stimulus didn't work is a myth promoted by Republicans. If the stimulus didn't work, we'd have suffered through a long recession and would have high unemployment to this day. You don't even have to look far to find evidence of this: European countries forced into austerity have had precisely the kind of anemic economic and labor market growth that Keynesian economics predicted.
> I know I'm just a lowly programmer and engineer who shouldn't opine about economics very much, but I observe simply this: The "stimulus" didn't work.
That's not an observation, that's a conclusion that requires a prior conclusion on a hypothetical that requires substantial economic analysis to have any credibility on: to wit, what the economy would have done without the stimulus.
My read is that the monetary stimulus by the Fed did exactly the prevention of imminent disaster that it was supposed to do. It didn't do the kind of improvements that take fiscal policy to do -- because it wasn't fiscal policy -- which isn't a difference of degree of magnitude, but kind.
> I find arguments about how it wasn't big enough to be null, because it isn't clear that we could have afforded much more
The only arguments I've seen about insufficient quantity of stimulus have been about the government (not Fed) fiscal stimulus of 2009 (ARRA and related bills). Given the low price of government borrowing, its quite obvious that we could have spent a lot more in (and since) 2009 on fiscal stimulus; the reason we didn't is political, not available-resources driven.
But that's a whole different thing than the Feds monetary stimulus.
> It's been 8 years now we've been on this policy.
What policy, exactly? Most of the Feds particularly intense monetary stimulus finished several years ago and has been in winding-down/settlement for the last few years, ditto with fiscal stimulus under ARRA. And 8 years ago (early 2008) was before the crisis and stimulus responses; if you are talking about the stimulus -- both monetary and fiscal -- adopted in response to the 2008/9 crisis, it started less than 8 years ago, and the intense policy ended several years ago, so in no sense have we been on a common stimulus policy for eight years.
> Nobody 8 years ago would have predicted what happened.
Both Austrians and Keynesians (among others) predicted that the actual stimulus that was engaged in by the Fed and government would fail to achieve what people wanted from stimulus (for, naturally, radically different reasons). To say that no one predicted the failure of the stimulus that was adopted is, simply, incorrect.
The reason the "stimulus" didn't work is that it costs more to the economy to produce the money that was spent to "stimulate" it than the economic benefits of that spending could produce.
And yes, 8 years ago people did predict what happened, exactly, namely look at the archives of http://mises.org and you will find articles predicting this result.
The problem is, it doesn't fit the political desires.
If you really want to stimulate the economy, by getting more money being spent, simply cut taxes and cut inflation. (Which means cutting government spending). You cut monetary inflation and taxation and individuals and businesses will have more money at the end of the day to spend on things.
Unfortunately, cutting government spending doesn't fit the "lets promise people free health care and education to get elected" agenda.
The Bush "stimulus" didn't work either. We had a housing bubble, but that wasn't exactly a net positive for the economy.
The problems is the "Science" of economics has been compromised to the point where people aren't even aware of the predictions that this would fail (you weren't for instance).... because what passes for economics is more akin to rationalizations for political policies, rather than a science. (outside of places like the Chicago and Austrian schools.)
Let's assume rates reach a point such that personal savings accounts have an interest rate of 0% or negative. How is this any more an incentive to spend than it is an incentive to have a box with thousands of dollars in cash under your bed?
There's a huge difference between a negative federal funds rate and a negative savings account interest rate. The former means banks get paid to borrow money; crazy, but maybe not broken in the instant-implosion sense (would need further careful consideration). The latter means savings accounts charge a percentage of the balance to maintain that balance; that would produce runs on the bank. I know I'd pull 100% of my money out of any bank that tried to pull a stunt like that.
Do you have money in a checking account? Since there still is some inflation, checking accounts pay a negative rate, after inflation. In fact its even pretty hard to find a savings account that pays > inflation rate.
Are you sure you would pull your money out if all the banks started charging -0.1% annual interest? If you have your money in your house there's a higher risk of theft, more than enough to counter the -0.1%. Add in the inconvenience of moving large amounts of money around by hand, not being able to write checks, and no automated bill pay, and I'm still keeping my money in the bank.
Yes, I'm sure. I certainly wouldn't stuff it in a mattress as cash, though. I'd start by finding a bank or credit union that didn't, as I'd be surprised if they all made that move at once. If that failed, I'd look towards accounts with a broker instead, or some other institution.
It seems to me that in this situation savings accounts would have the nominally negative rate, whereas checking accounts would have a nominal rate of zero. Since inflation affects the real value of both accounts equally, then the checking accounts would have a higher real rate.
Since both accounts are covered by FDIC insurance [0], it seems that the only difference (unless I am missing something) lies in the rate of return, thus ceteris paribus and the checking accounts have a better rate of return compared to savings accounts. Both have real negative rates, so the situation would be an active discouragement to hold the government-managed currency in any form.
Regarding cash holdings, you are right that they are probably a bad idea. However, if numerous banks could potentially experience a crisis beyond the intervention capabilities of the Fed and Federal government, then it would probably be more sensible to move the money into cash and store it in safety deposit boxes, possibly across multiple banks. This to me seems an unlikely scenario, but not necessarily impossible.
I am reading much of your premise to be related to checking accounts (check writing and automated bill pay). Most people don't carry a large balance there so a negative interest rate on those accounts will not really have a large impact.
Yet on savings accounts, or those accounts whose intent it is to be liquid yet remain relatively unused, could be impacted by this. Which at that point, again under your premise of robbery, a person is essentially wagering whether they would rather be guaranteed to be fleeced incrementally, or run the possibly of someday being taken for all of their savings. At that point I think you would see many people start to withdraw large amounts of savings, whether to be stored underneath a mattress or into bonds or some other investment, while still keeping an active checking account.
Since most people don't do this already despite losing money to inflation, I doubt there will be a significant change in behavior for most people when interest rates tip negative.
Don't underestimate perception. Fees/taxes/"negative savings interest" are much more visible than inflation. I'd be surprised if that didn't cause bank runs.
For my part, I already carefully manage how much I keep liquid versus invested, but anything equivalent to a fee would cause me to switch institutions or otherwise drastically change this strategy.
At some point, people might be afraid that the cash will be stolen or destroyed in a fire or something, and not think the risk is worth it. (But it seems like an easier compromise option might be to find a bank somewhere in the world that offers a non-negative interest rate and try to transfer the money to an account there. Though in the specific case of Americans, some foreign banks don't want them as depositors now because of U.S. account disclosure regulations.)
For individuals, this MIGHT be an option, though you would really have to consider the implications of storage, anti-money-laundering regulations, and security.
As for transferring overseas, you now have to consider the significant added risk of currency fluctuations, which over the mid-term can easily swamp out any impact of interest rates.
You can put a box with a thousands of dollars under your bed, but a company that needs to hold onto a few million to make payroll can't just put it under their collective beds. Maybe they decide to put it in the money market, which invests in commercial paper, instead of a bank which parks it at the Fed.
If I was a company faced with that problem I look to see if I could take the money off shore and pay through wire transfers if the fees were cheaper than the negative interest rate being charge.
If the rates go negative enough banks will set up cash management tools where money is held as cash rather than on deposit at the bank (i.e. banks won't be able to lend against it).
The existing interbank system couldn't be used for that though, so a parallel reconciliation, netting, and transfer system would have to be set up and dealing with physical cash is fairly expensive (don't forget insurance). I wouldn't expect it unless rates go below -1% and maybe even further.
It's an incentive for the bank to have as little money as possible. The banks will do everything to get rid of cash, which, in theory, should devalue the currency.
Bottom line: negative rates are all about devaluing the currency against other currencies in the world so that the exports become cheaper.
> The banks will do everything to get rid of cash, which, in theory, should devalue the currency.
Not necessarily. Far more likely is to encourage investments or holding cash-equivalents (bonds). Most banks are not going to engage in currency speculation merely because of a negative interest rate.
> Bottom line: negative rates are all about devaluing the currency against other currencies in the world so that the exports become cheaper.
No. That is not the goal of negative rates. The goal of negative rates is to encourage investment and spending, not to devalue the currency. The government has much more direct means for devaluing the currency if that's the goal.
Eh, well, it's either inflationary or deflationary... Depends on how people react.
Taking your money out of the banking system (as paper into a box) is extremely deflationary. In most places you'll take around 10 times more money from circulation than what you put on the box, but the US keeps this multiplier much higher.
Commodity prices have already crashed through the floor, seeing them crash further may actually start freaking people out.
Frankly I think we need to stimulate the demand side of things -- give people free money, and don't let the banks screw it up like the subprime mortgage crisis.
Exactly, my savings account would be deleted immediately and shoved into tax free or inflation protected bonds.
I bet many banks when confronted with those individuals that have savings account with $200,000 cash as an emergency fund will either pull them out entirely or pay the bank for a safety deposit box.
This is one of those things where is not a law that says "you may not keep cash in a SD box," however there are several laws and regulations that make it sub-optimal or difficult to disprove an allegation that you broke some other law.
1. No FDIC insurance (no legal impact obviously but flooding is not unheard of)
2. If you have a large amount of cash with no traceable origin, the IRS is definitely going to want to know how you came about it. Concealing the source of cash violates federal regulations.
3. I've heard many times that directly taking cash out of circulation is itself a crime, and that courts have interpreted SD boxes as such, however the only actual source I can find says that physically destroying cash (e.g. burning it) is a crime.
I have edited my post to reflect the fact that I'm actually not 100% sure now :)
That comment worried me: I found this reference from BankRate saying putting cash in a safety deposit box is only illegal if it is concealed for tax evasion purposes.
I can't seem to find anything definitive that identifies the legal grounds to claim that the storage of cash in a safety deposit box is illegal in the United States, but I did come across a couple of references that indicated that certain banks have included the prohibition in their terms of use.
Given that the contents of a safe deposit boxes are not covered by FDIC insurance, I can see why it's not necessarily recommended.
> Let's assume rates reach a point such that personal savings accounts have an interest rate of 0% or negative. How is this any more an incentive to spend than it is an incentive to have a box with thousands of dollars in cash under your bed?
Having a box with thousands of dollars in cash under your bed is, itself, an incentive to spend (specifically, on goods and services related to home security, protection of dollar bills from vermin, flooding, etc., and similar things.)
For one thing, there are assumed costs with storing cash under your bed. (Fire, risk of theft, transaction costs, etc.) There's a reason that banks/anyone will generally charge you to store valuable goods (in a safety deposit box).
Given the implicit costs of storing cash, a low-interest bond or investment looks better.
> Presumably negative rates are a response to deflationary concerns. Under that scenario, cash under the bed would lose value faster than it would in a savings account
>As a borrower you are getting paid to borrow, thats a good incentive to go spend..
> Presumably negative rates are a response to deflationary concerns. Under that scenario, cash under the bed would lose value faster than it would in a savings account
I wish the Fed would research sending checks to tax payers as a stimulus strategy. Because it appears the low interest rate (and QE) strategy isn't as effective as it once was - in part due to uncooperative banks.
If/when the time comes to put the breaks on the economy, the money could be removed from circulation with a slight uptick in taxes of some sort (income, gas, tariffs, whatever) -- but unlike a normal tax, we would apply it against the Fed's balance sheet and not place it in government coffers.
Milton Friedman and Ben Bernanke have called this idea helicopter money.
Results were mixed - The dollars amounts weren't really a windfall to most people, so some additional spending went on. But most people realized they would need to repay that money at tax time, and held onto it.
I'm suggesting the Federal Reserve do this -- not the federal government. The federal government can't create money, so the stimulus effect is lessened.
> I wish the Fed would research sending checks to tax payers as a stimulus strategy.
That's a fiscal (not monetary) stimulus strategy, outside of the Fed's purview but something Congress can do: its been done (the most direct example being the one-time tax rebates in the Economic Stimulus Act of 2008.)
> Because it appears the low interest rate (and QE) strategy isn't as effective as it once was - in part due to uncooperative banks.
Monetary stimulus has always been a limited tool useful for smoothing things out, with most major effects requiring fiscal stimulus. The Feds job is to manage the money supply, with certain economic goals in mind. Broader efforts to manage the economy are reserved to Congress.
I'm not sure expecting more of the Fed is the right response to Congress not taking effective action on stimulus.
This is a classic failure of aggregate demand, and it cannot be fixed with monetary policy alone. I'm struck by the continued relevance of the lessons of the Great Depression.
For example, see these lines from FDR's First Inaugural Address:
Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply.
Primarily this is because the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.
True they have tried, but their efforts have been cast in the pattern of an outworn tradition.
>>Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence.
They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.
> New York Fed President William Dudley said last month that policy makers were "not thinking at all seriously of moving to negative interest rates.
> "But I suppose if the economy were to unexpectedly weaken dramatically, and we decided that we needed to use a full array of monetary policy tools to provide stimulus, it’s something that we would contemplate as a potential action," he said on Jan. 15.
The Fed continues to fritter away whatever credibility it has left by waffling back and forth on interest rates.
It raised interest rates and committed to 2.0% core inflation by 2018 just two months ago. By including this long-term negative interest rate scenario in its 2016 stress tests, it is basically admitting that there is some non-negligible probability that it will be unable to follow through on this commitment, and that banks should be prepared to weather the storm if and when it completely loses control of its grip over the direction of the short term interest rate.
The article does not actually speculate on what might happen if the Fed were to reverse its rate hike and instead lower the FFR into negative territory. I'd imagine that basically nothing would change, and that the banks would simply take a 0.25% haircut on their holdings of 3-month treasury bonds as they have been doing in Europe for the past 1.5 years. They will not pass this negative interest rate onto regular customers as this would either (a) drive them to another bank which would benefit from the new deposits or (b) force consumers to withdraw deposits and hold cash instead. Banks need these deposits to loan against, and a 0.25% "holding tax" on a relatively small portion of their holdings would not justify the loss in deposits. Banks will just eat the hit to their profit margins and life will go on as normal in the supply side of money world.
What I read from the article:
Relax, it is just a stress test.
We aren't going to actually do this.
We would only do this in the case of an emergency.
We would totally do this, but only if we have to.
We have to do this.
I want to know how bankers would handle negative salaries.
Edit: Sorry if that sounded snarky, it was my attempt at a witty way of saying, "it doesn't make sense for there to be a negative price for provision of a scarce good, imagine if we did that to labor, like yours".
Sour Crude in some areas of the US hit negative values a few weeks ago. It means that supply has grossly outstripped demand, and that storage of the good has become the primary cost.
In the case of banking, it means that liquid cash has become so worthless (ie: too many people are saving money) such that the Banks are now charging you for the privilege of keeping the money safe.
Even so, something is fundamentally wrong if markets are signaling, "no, we'd rather you not lend us money to work with", even if the fix lies somewhere else. We should never be at a state where "forgoing the use of money so that others can invest it" is a non-scarce good.
(A charge merely for having physical banknotes on demand can make sense, of course.)
In contrast, there are sane worldstates that correspond to "sour crude provides economic value less than its upkeep cost".
Yes. Which is why this is a stress test. Will the banks survive a financial crisis if the entire world switched over to negative rates?
Well, the Fed wants to know, which is why they're running this doomsday test scenario. The Fed currently expects to raise rates about 2 or 3 more times this year btw... so the scenario probably won't happen, but that doesn't change the fact that lead bankers are preparing for the worst.
In other words, the article is simply stating the following fact: big banks in America are thinking about various financial doomsday scenarios. I don't think that's a bad thing at all.
Fair enough, I assumed the angle was less "hey let's kick the tires" and more "the Fed wants to make interest rates negative", since a lot of economists have been recommending the latter.
In the scenario described, money is no longer a scarce good. At 0%, they couldn't give it away (to banks). When it is negative, the fed is paying banks to take it.
Even then, negative doesn't make sense as a market price. Give me X dollars, and I only have to return Y such that Y is less than X? "I'll have infinity, thanks!"
Skimmed the article, did a Ctrl+F, didn't see mention of essentially channeling free money into depressed bond interest rates leading to even more aggressive corporate stock buybacks which predominately benefit the top 1% investor class in the United States, without any discrenable benefit to wage-level workers or the drastic income inequality, was not surprised.
So bad fiscal policy and regulatory policies have us finally at the end of the road? Going negative? Since people won't spend and are so intent on saving they will force their hand or punish them so they become good little Keynesians ?
Well the only upside is that it won't encourage people to want a digital currency based system. Those little bank notes under the bed cannot be hacked, cannot be forbidden to be spent on specific goods or people, and cannot be confiscated out of bank.
So I guess this just really comes down to a case that over the top government borrowing is pulling so much money out of the markets that they need to force private investors to put money in
Congress should have never given up it's constitutional power to control monetary policy, the Federal Reserve (which is neither) should be audited and the backlash from the revelations should be used to push a revocation of the Federal Reserve Act which was passed under dubious circumstances by shady men connected to the European banking oligarchy, along with various other bad legislation pushed through by the same groups (that also pushed us into the world wars.)
I've said it before, and I'll say it again. Bankers are more the enemy of the people than terrorists, and just because Dimon and Blankfein need an extra 300mil bonus doesn't mean we should allow them to gut our economy. Unlike some of the placating bullshit I've seen people posting in this thread, the 07-08 crash was because of abuse, fraud, and lack of oversight, and we need to start sending the top people to jail. If not, then we are just going to have another recession, and another, and maybe a depression.
Adjusted for inflation rates are basically negative already anyway! Negative rates punish the middle class, the workers, the pensioners, and retirees, while funneling even more money to the already grotesquely wealthy uber-elite.
Central banks exist to cram more credit into an economy than it would otherwise support. If the people refuse to borrow & spend, they'll just take the money right out of their bank accounts.
Even hinting at this level of meddlesome social engineering by the managers of our currency ought to elicit reactions of disgust and outrage.
The way I understand it, the banks do not simply get money from the Fed. Combined with negative interest rates that would be "money for free".
It is similar to how you a credit from a bank when you buy a house. Yes, the bank gives you money but you give (the rights to) the house to the bank until you fully paid your credit back.
The banks then goes to the Fed and says: "Here, thake this house as security and print me some real money."
The Fed says: "Great house you have there; here is the money and here is some more."
In the end this leads to the creation of things that are accepted by the Fed as securities, for example houses. With negative interest rates, the Fed basically pays for the creation of such securities.
> The way I understand it, the banks do not simply get money from the Fed. Combined with negative interest rates that would be "money for free".
I don't understand this. Under a negative interest rate scenario, wouldn't the banks be paying the Fed for the privileged of keeping their money there? Where is the "free money" coming from?
I was talking about the scenario where the Fed gives out a credit in exchange for securities. This usually is accompanied with postive interest rates such that the banks have to pay back more.
Are you talking about the scenario where the banks deposit money to the Fed?
> Are you talking about the scenario where the banks deposit money to the Fed?
Yes, I thought that was what negative interest rates refer to.
> I was talking about the scenario where the Fed gives out a credit in exchange for securities.
Are you describing quantitative easing? Because my understanding that was just the Fed buying securities (usually government ones) on the open market at market prices like any other buyer. I think the big difference in the negative interest rate scenario is the selling bank would have less incentive to then take the cash and park it in the Fed afterward.
If it's a straight bailout, my guess is the Fed would be in a strong position to set the terms so it wouldn't have to pay the bank to take the money.
To my understanding banks go to the Fed when they need money as in dollar notes instead of money as in credit balance. The Fed does not buy the house, it just takes it as security. Meaning it takes the right to physically get the house if the terms of the credit are not fulfilled but it won't actually do anything physical as long as the terms are ok.
This makes an interesting situation for the banks. When you have a house (or the rights to one) to use as security, you can give it to the Fed and get free money for it. Now you have more money and can do stuff.
If you don't have the house, you might actually want to get one in order to get the free money. This makes the money not so free because with a great house come great responsibilites.
If the Fed bought those houses outright it would have many houses but the Fed does not need many houses, so that wouldn't make much sense. It would work financially to some extend and increase the money supply and give incentive to build houses but it wouldn't actually directly create anything beneficial to anyone.
To what fees specifically are you referring? If you mean things like low balance fees or overdraft fees I think they're both appropriate when they're not implemented or marketed in a predatory manner.
I'm not aware of any fees that are instituted "instead of the bank paying interest" unless you're talking about something like a low balance fee on a non-interest bearing checking account.
Most big banks in the US have monthly fees for keeping your money in an interest-free checking account. This ends up costing you something like $5-25/month unless you (a) also set up direct deposit with them or (b) maintain a minimum balance that is typically relatively large. This is why I keep my money with a credit union instead: better customer service, better rates, no stupid fees.
You can find free chequing accounts though and if you're careful enough to not get caught by overdraft fees, they're the way to go. I'm Canadian and I know 2 banks here that do it, but I'd imagine similar exists in the US?
Not all credit unions are immune to stupid fees. The "low aggregate balance fee" is alive and well locally. People wonder why Walmart is gaining popularity.
WTF!. Why doesn't the Fed just send money to consumers? You can't budge CPI by making Ray Dalio and Jamie Dimon richer (which is the main effect of ZIRP). There's only so much eggs and butter they can consume.
> Why doesn't the Fed just send money to consumers?
Because the Fed isn't the government, just a quasi-independent agency within the government with limited scope of operations, and "just send money to consumers" isn't within that scope.
If you think the government ought to do this, then that should probably inform your votes for Congress and the President, this being an election year and those being the actors that would need to be involved in that.
Actually, according this New Yorker article the Fed can just print money and distribute it to the populace. It's call "money finance" and has been used in the US before.
There is at least one word (most likely "since" before "2008"), as well as examples and argument on the lack of legal mandate, missing from your argument.
First of all, there's a misconception on this discussion here. The Fed is PAYING banks the Fed Fund Rate (currently sitting at 0.5%) for parking their excess reserves with the Federal Reserve overnight. So a negative interest rate means that the banks have to pay the Fed money to hold their money. You can think of this as if your bank charges you to hold your money for you.
Why would the Fed want to do this?
Banks make money by lending out deposits and charging a higher interest rate than what they pay out. To support their lending operations, banks need to hold a percentage of the asset as reserves. In recent years, banks have been holding $2.3T [1][2] more than the minimum reserve that is required. This means that the banks are sitting on the deposit and not lending it out. The excess reserve are then deposit with the Federal Reserve earning 0.5% interest. What the Fed wants to do is encourage banks to lend out the money rather than sit on it so that it stimulates the economy. (More lending->increase asset prices->people feel richers->people buy more stuff->companies hire more people->stimulates economy)
Why aren't banks lending?
There are a number of reasons why banks are not lending as much as they used to. After 2008, banks have become much more risk adverse. In addition, regulations have forced tighter lending standards on the banks reducing the amount of loans issued[3]. In addition, Dodd-Frank credit risk retention regulation now forces banks to have "skin in the game" when they issue and securitize loans and mortgages [4]. Because of this and the collapse of 2008 is still fresh in the bank's minds, they have increased lending standards and reduced their risk profile.
So, the result is that they sit a huge pile of excess reserves that they can't lend out.
In normal environments, the market resolves this problem itself. Banks that are lending will offer higher rates to attract deposits from the banks that are not lending and offering lower rates.
However, in recent decades, there's been a major consolidation of banks. Between 1990-present, 37 regional banks have combined into or acquired by the 4 large banks (Citi, JPMorgan Chase, BoA, Wells Fargo)[5]. These top 4 banks alone hold 6.46T of the $10.6T in consumer deposits. These four banks have pay an interest rate of 0.01%. The national average interest rate is 0.06%.
On the other hand, commercial lending banks, like CIT, Sallie Mae, and Synchrony, are trying to attract deposits paying over 15x the national average interest rate. These traditionally lending banks have had to set up high yield online banking operations to attract deposits to support their lending operations.
The issue is that most consumers don't shop around for high yield accounts. Many don't realize that there is such a drastic difference between the high yield accounts and their local banks.
This leads to a significant amount of assets being locked up at the large banks that aren't lending. Lenders, like Sallie Mae, end up paying higher rates on deposits and need to charge higher rates for their student loans.
What happens to consumer deposits when Fed Fund Rate goes negative?
For the past couple of years, these large banks have been trying to shed excess deposits. They have lowered their interest rate to practically 0%. The large banks have even charged large institutional depositors to hold their money [7]. If the Fed Fun Rates go negative, banks will try to charge greater fees for banking services and/or encourage consumers to move their funds to other banks. The difficulty here is that the banks want to maintain the relationship with the consumer to generate future revenue while not holding the deposits.
This misallocation and inefficiency in the deposit marketplace is what we are trying to solve with smart technology.
This is hugely disappointing. Its been 8 years since the economic crash and the Fed has been trying to inflate this economy using monetary policy and we have yet to eclipse 3% real GDP growth for a whole year. They FED has been trying to create inflation and they have failed. Where is the critical thinking at the policy making/ decision making level ? At some point we have to reach the obvious conclusion that current economic policy models are broken, don't work, and we need new leadership and a fresh approach.
Obama is largely to blame for this. He chose to listen to establishment/wall street economic advisers rather than more progressive ( say Keynesian) thinkers. This is why you are seeing Bernie/Elizabeth Warren gaining in popularity. Quite sadly, the Gap between the middle class and extremely wealthy in this country have never increased more so than under Obama, a Democrat.
"When you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis."
Shorter Krugman: Cheat poor people out of their wages to make the government look like it's doing something about unemployment.
How about increase demand for labor via increasing overall aggregate demand via stronger fiscal policy ( lower taxes or high spending depending on your polics)
