If negative rates don’t spark inflation (but just a little bit, to the 2% target most central banks have) and if they tend to erode bank profits and thereby make the financial system less stable and more prone to “accident,” why on earth are they the newest, shiniest toy in the central bank play book?
Yes, that was a really long question. And mostly rhetorical. We know that central banks are at an impasse. Short of helicopter money or directly purchasing stocks and government bonds, they are finding it harder to “stimulate” anything, except, possibly, headline writers.
All negative rates have really accomplished, according to a research note from Morgan Stanley, is the erosion of bank profit margins and a reduction in the amount of credit created by the banking sector, especially in Europe. Lower profits and fewer loans. That’s not what the policy is designed to do.
Unless the policy has another motive. If you have a financial system where the banks are too big to fail, how do you change that? One way of changing it is to transfer the role of credit and money creation away from commercial banks and to central banks. Make the banks utilities.
Don’t look at me. It wasn’t my idea
It was the new president of the Minneapolis branch of the Federal Reserve, Neel Kashkari. Kashkari, who you may remember from his days as the head of the Troubled Asset Relief Program (TARP), went on CNBC to recommend a “transformational solution” to the systemic risk posed by TBTF (too big to fail).
He said, “If other countries want to take huge risks with their financial systems, we can’t stop them… ‘Too big to fail’ is not just a US problem, it’s a global problem… Capital is the best weapon against shocks to the financial system.” The global solution, then, is for banks to hold much larger capital buffers against future shocks/losses.
If banks do that, though, it takes them out of the business of making loans for a profit. Or, put it another way, maybe it simply takes them out of the business of recklessly lending or speculating with shareholder/depositor funds. Either way, it takes the banks out of the action they really want to be in.
That might be a good thing for everyone else. But if the government replaces the financial sectors as the chief creator of money and allocator of credit in the economy, it’s definitely not an improvement. Greed and avarice will be replaced by a lust for power and an overweening sense of intellectual pride (and moral self-righteousness).
You’ll have Bernie Sanders and Jeremy Corbyn creating money out of thin air to make everything free and create social justice with the click of a mouse. Come to think of it, that seems to be what the British and American electorates are in favour of.
Category: Central Banks