Question: Why can't the fed go to a negative interest rate?

[blazespinnaker]

Basically, pay people to borrow money.

A neg rate of -0.01 .. that can't hurt, can it? What's the real difference between that and 0?

And if -0.01 is OK, what about -0.02? And so on.

I don't understand why they have to stop at 0.

We're in the midst of massive deflation here. The money supply has vanished due to the credit crunch. Why not re-inflate? At least temporarily so people can be assured that the fed is always there to backstop and to have a little more confidence.

[Supercilious]

Re: Question: Why can't the fed go to a negative interest rate?

Basically, pay people to borrow money.

A neg rate of -0.01 .. that can't hurt, can it? What's the real difference between that and 0?

And if -0.01 is OK, what about -0.02? And so on.

I don't understand why they have to stop at 0.

It's just accounting and distribution of funds.

0% rate + big tax stimulus package= negative interest rate in disguise

[jimmygu3]

Re: Question: Why can't the fed go to a negative interest rate?

Basically, pay people to borrow money.

A neg rate of -0.01 .. that can't hurt, can it? What's the real difference between that and 0?

And if -0.01 is OK, what about -0.02? And so on.

I don't understand why they have to stop at 0.

We're in the midst of massive deflation here. The money supply has vanished due to the credit crunch. Why not re-inflate? At least temporarily so people can be assured that the fed is always there to backstop and to have a little more confidence.

I don't think the problem is with getting "people" to borrow money. The problem is getting banks to lend money. The CBs lower rates, companies use the liquidity to shore up balance sheets, but very little of the money makes it to the consumers who are desperate for it.

Why not, perhaps through Fannie or Freddie, offer 0% loans directly to American citizens? You could borrow up to, say, 6 months' salary, with a $50k cap. Payments would be <5% of monthly salary for 10 years. They could even set it up for automatic withholding from paychecks, and suspend payments during unemployment.

Jimmy

[blazespinnaker]

Re: Question: Why can't the fed go to a negative interest rate?

It's not a bad idea, really.

They do it for corporations, why not for people? Or do we only have welfare for the rich?

[jimmygu3]

Re: Question: Why can't the fed go to a negative interest rate?

It's not a bad idea, really.

They do it for corporations, why not for people? Or do we only have welfare for the rich?

Oh yeah, and if you want to make it an effective negative rate, take the payments out pre-tax.

I also think a similar principle could be applied to mortgages. Offer Americans low-interest loans based on current appraised value. The bank would get the cash and a no-interest lein on the house for the remainder of the outstanding balance. Or the bank could elect to continue servicing the mortgage under the new payment terms. Or they could foreclose and spend $50k trying to sell it as it gets stripped of all the copper and fixtures. Which would you prefer?

I posted a similar proposal last year.

Jimmy

[sunskyfan]

Re: Question: Why can't the fed go to a negative interest rate?

A an effective negative interest rate caused the housing bubble in the first place. These are "hair of the dog" approaches. Rogers is right. The sooner we let this thing go the quicker competent people can take over and make things right.

[blazespinnaker]

Re: Question: Why can't the fed go to a negative interest rate?

A an effective negative interest rate caused the housing bubble in the first place. These are "hair of the dog" approaches. Rogers is right. The sooner we let this thing go the quicker competent people can take over and make things right.

Nothing personal, but I think Rogers should be forced to cleanup the mess caused by every suicide caused by loss of job / money / etc.

I have no problem with his theoretical positions, however, I'd like to think as civilized individuals we can figure a way to come down from the bubble without causing massive economic hardship.

Jim Rogers was the one to suggest to get rid of the Federal Reserve, you know, the institution that regulates banks.

The absence of regulation is what cause much of this mess to begin with. People, when left to their own devices, will act like irrational herds. Government is there to modulate and tame the booms and busts of the economic cycle.

[sunskyfan]

Re: Question: Why can't the fed go to a negative interest rate?

I understand your point but I am not, nor do I think he is, advicating that we allow people to die. The illusion is that there is a fix. It reminds me of people going to mexico to get a cure for cancer or psyquic surgery. Who is more unethical? The person who deals with reality or the person who comes up with BS to make patient "feel better"? Government is relatively good at dealing with humanitarian issues. It has never once "fixed" this kind of economic crisis. The quicker we get to what is "real" and what value it has (thus this liquidation) and deal with the consiquences the less cumulative pain there will be.

[Guest]

Re: Question: Why can't the fed go to a negative interest rate?

Sunsky fan - In every analogy to biology or medecine, your point fails, while the "moderation" point wins. Job number one when an organism is near death is to eliminate the most immediate syndromes causing shock to the organism. This holds in biology, it is highly unlikely to be the diametric opposite in the global credit markets, which are a complex organism too.

Purist concepts are irresistible to some of us. They are correct in the largest sense, but they most certainly can contain a high risk of failure at the near death moments. Think: irreparable tissue damage. There is a real analogy in the tissue of current global markets. Anyone who wants to argue the global credit markets aren't having a heart attack has an uphill argument to make that assertion today.

First stabilize the patient with profuse quantities of plasma, stabilize heart rate, metabolism, etc. Eliminate the worst of the shock symptoms. Shock alone can be fatal. THEN, and only THEN do you examine your more fundamental treatments.

It would appear an elementary insight.

_______________________________

Jim Willie (OK, he's a bit of a gold bug, but not stupid).

QUOTE:

EFFECT OF ABSENT SHORT-TERM CREDIT: Few seem yet to comprehend the depth of the risk to the USEconomy if short-term credit continues its vanishing act. Most realize when the US banks are insolvent and lend less, the USEconomy is assured a recession. They do not comprehend that when short-term credit is denied, the USEconomy disintegrates. Imagine a man whose bones are turned into mush, trying to walk. That is the economy with insolvent banks. The man becomes a body without a heart and blood circulation when short-term credit is absent. The commercial side requires it for supply of food, gasoline, housewares, hardware, building materials, and more. Imagine riots for toilet paper, let alone gasoline and food! The financial side requires it for supply of ATM cash, credit card usage, and even payroll income. A heart attack is not a proper analogy. More like a science fiction movie where the victim is vaporized, or is burned suddenly into a heap of plasma.

[sunskyfan]

Re: Question: Why can't the fed go to a negative interest rate?

Perhaps the failure of your analogy is that "the patient" that is going to die is the totality of the economy. I agree that the current regime of capitalism may disintegrate as it is doing now. People will continue to live and work and have a life. We are NOT defined by the current regime. If your life depends totaly on something that is clearly failing then you have mistakely indeed put all your eggs in one basket. Government's first responsibility is to preserve civilization not to preserve the current regime of capitalism. A new regime will form and be more effective than the current one. The sun will rise tomorrow not matter how wrong the bankers and politicians are. I actually think the reboot will be very fast if we do not hold on to our illusionary expectations. What will come will be better and stronger. With two young sons I in no way want the economy to quit functioning but I would find it a complete tragedy if we sacrifice their future to preserve the illusionary wealth of people who made some very bad decisions. No one is above doing the basics of life and dealing with those consiquences.

[The Outback Oracle]

Re: Question: Why can't the fed go to a negative interest rate?

I can't believe this stupid thread...you've had negative interest rates after tax for 50 bloody years!!!!!!! What the hell is going to suddenly make it different now??????????????????????????
I mean what's the real after tax interst rate over the last few years. most of us accept the fiddle with CPI story and follow John Williams...so let's see what roughly 12% inflation; interst rates 2%, negative 10. now addin tax effects, interest rates negative..what 13 to 14%!!!!!!!!!!! It's been going on for years!
How bloody negative do you want to make them????????????
Give me a reasonable number to work with here and let's examine where the hell the economy will go. I'll tell you the answer already...negative 100%...just extend the logic and GIVE everyone whatever money they want to come round and pick up!!!!
Problem solved!!!!!

[blazespinnaker]

Re: Question: Why can't the fed go to a negative interest rate?

Leave it up to the invisible hand? The invisible hand says that dumb and old people should be euthanized and children should be put to work, and that slavery make for a great economic system.

Economically, those ideas make great sense. Emotionally, ethically, morally - not so much. That's why we have governments, federal reserves, bailouts, etc.

[The Outback Oracle]

Re: Question: Why can't the fed go to a negative interest rate?

What a load of codswallop!!!! The invisible hand would still have it that if you want to borrow money you would have to go find some from someone who had saved some and pay him/her a reasonable rate for the loan.
It's the opposite of the invisible hand that has made all this. You interfered and made a world where nooone was responsible for what they did.
As to euthanise old people, once you have your negative interest rate,,,what, let's say 20%....so you confiscate all the savings people have for their retirement....and tax them for having them! So what is the saving interest rate ...minus 15%? Or aere we going to leverage the negative interest too?
Once you have this regime you'd have to euthanise all the old people because you are not allowing them anything to live on...quicker to shoot all us poor old bastards than for us to starve to death!
Hells bloody bells!!!!!

[The Outback Oracle]

Re: Question: Why can't the fed go to a negative interest rate?

Can someone please explain to me, why it is a constant theme on itulip, that the savings of the prudent ought be confiscated??????? It keeps coming up time and time again!
Why is confiscation of savings seen as a solution? Please tell me how the confiscation of savings helps!!!! ...because i'm bloody lost.
And don't give me crap about.."well we don't really mean that" because that is exactly what you mean. It has been going on for 40 odd years and now you want to accelerate the pace by not only confiscating the principal but charging people to have savings.
It hasn't occurred to you that might just be the problem?

[metalman]

Re: Question: Why can't the fed go to a negative interest rate?

assume you mean negative nominal interest rates?

Bold, but impractical–eliminating the bound altogether

The most daring suggestion for escaping the zero-interest-rate trap is one that eliminates the zero lower bound altogether. How can this be done? As noted in the first part of the presentation, the zero bound on interest rates exists because money pays a sure nominal interest rate of zero. No one would be willing to hold any asset that pays a negative nominal rate, as long as zero-interest money is available as a store of value. The strategy for eliminating the zero bound, therefore, is to make money pay a negative nominal interest rate, by imposing some type of ‘carry tax’ on currency and deposits.

It’s easy to envision such a system with regard to deposits at the Federal Reserve or transactions deposits at banks; for the most part, the technology to implement such a system is already in place. A tax or fee on Reserve deposits of 1% per month, for example, would mean that those deposits, in effect, pay a nominal interest rate of roughly minus 12%.

The technological difficulty lies mainly in imposing such a tax on currency. In the 1930s, Irving Fisher of Yale University, one of the greatest American economists, proposed such a system, in which currency had to be periodically ‘stamped’, for a fee, in order to retain its status as legal tender. The stamp fee could be calibrated to generate any negative nominal interest rate that the central bank desired.

http://www.itulip.com/Select/feddeflationplaybook.pdf