Down the banking rabbit hole
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.