Down the bank­ing rab­bit hole

The Compass - - EDITORIAL - Rus­sell Wanger­sky Rus­sell Wanger­sky is TC Me­dia’s At­lantic re­gional colum­nist. He can be reached at rus­sell.wanger­ Twit­ter: @Wanger­sky.

I am nei­ther an econ­o­mist nor a banker, so per­haps I’m miss­ing some­thing im­por­tant here.

But the idea of neg­a­tive in­ter­est rates — mak­ing you pay to save money while once again low­er­ing in­ter­est rates for bor­row­ers — sounds like a trip into a fis­cal bizarro world.

There are coun­tries that are al­ready flirt­ing with the con­cept: Swe­den has set a cen­tral bank in­ter­est rate at neg­a­tive 0.5 per cent, while Switzer­land has ac­tu­ally is­sued bond of­fer­ings of neg­a­tive 1.12 per cent. Ja­pan’s cen­tral bank is play­ing the same game.

Ear­lier this week, Janet Yellin, the chair of the board of gov­er­nors of the U.S. Fed­eral Re­serve, told a con­gres­sional com­mit­tee in the United States that the re­serve has done re­search on the im­pli­ca­tions of bring­ing neg­a­tive in­ter­est rates to that coun­try’s cen­tral fi­nan­cial sys­tem (al­though there are ques­tions about whether it would be within the re­serve’s le­gal au­thor­ity).

She put it like this: “In light of the ex­pe­ri­ence of Euro­pean coun­tries and oth­ers that have gone to neg­a­tive rates, we’re tak­ing a look at them again, be­cause we would want to be pre­pared in the event that we would need to … We haven’t fin­ished that eval­u­a­tion. We need to con­sider the in­sti­tu­tional con­text and whether they would work well here. It’s not au­to­matic.”

The idea be­hind the con­cept? To get money mov­ing in the econ­omy, even if it’s money con­sumers don’t have and aren’t likely to ever have. Neg­a­tive in­ter­est rates are sup­posed to push money out of banks and into the econ­omy; like­wise, they’re sup­pose to lower in­ter­est rates on loans to near-neg­li­gi­ble to en­tice busi­nesses and con­sumers to bor­row and buy. And buy. (Banks, of course, still do well, by bulk­ing up on fees and side­line charges, mak­ing the “profit” of neg­a­tive in­ter­est rates some­thing of a Tro­jan horse. Think gift horses and mouths when you’re buy­ing that beast.)

But re­ally, is it any­thing more than a last-chance dice throw when you’ve al­ready lost ev­ery­thing else at the ta­ble? If the low­est in­ter­est rates in a gen­er­a­tion aren’t mak­ing economies turn over at a brisk pace, why would we make it even eas­ier and cheaper to bor­row?

We live in a world where we hear reg­u­lar con­cerns about house­hold debt, and how low in­ter­est rates have seen that debt con­tinue to in­crease. The mantra of “big­ger, newer, more,” has never seemed to be so great: just imag­ine what would hap­pen to realty prices, for ex­am­ple, if you could get a neg­a­tive in­ter­est mort­gage, one that paid you more, the more you bor­rowed. The mind bog­gles.

On top of that, there was also news this week from the Broad­bent In­sti­tute — a left­ish think-tank — about Cana­di­ans and re­tire­ment sav­ings, the short ver­sion be­ing that a huge block of Cana­di­ans be­tween the ages of 55 and 64 have next to no re­tire­ment sav­ings, and will face a dra­matic fall in in- come at re­tire­ment.

But, say you are in­vest­ing in your re­tire­ment: where on Earth do you find large enough re­turns to fund a re­tire­ment, es­pe­cially if the com­par­a­tively safe world of the bond mar­ket might ac­tu­ally be shrink­ing your in­vest­ment with ev­ery pass­ing year? Does it force you out of bonds, leav­ing you with re­course only to the high-volatil­ity (es­pe­cially lately) world of the stock mar­ket?

What ex­actly will we do when peo­ple reach re­tire­ment age and the profli­gacy chick­ens come home to roost? Pay them to bor­row even more? At least the first lit­tle piggy knew full well he was build­ing with straw.

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