Could negative interest rates be coming to US banks?

A week and a half ago, the Bank of Japan shook up the markets when it announced that, for the first time, they would be imposing a negative interest rate on financial institutions. The move smacked of desperation as the once-proud archipelago continues to struggles against deflation, an economic battle it has waged since the 1990s.

Negative interest rates are nothing new in the arsenal of economic policy. Less than two years ago the European Central Bank took up the cause and, in turn, Denmark, Sweden, and Switzerland followed suit.

You’re guaranteed that more nations and central banks will jump on the bandwagon as the global recession intensifies.

Among those entertaining the idea is our own Federal Reserve. The Fed is asking banks to think about what they would do if negative interest rates were brought to the States as a sort of long-term policy. Under the Fed’s allegedly-theoretical plan, the three-month Treasury bill rates would go negative in the second quarter of 2016 (bottoming out at 0.5%), staying there until the first quarter of 2019 if not beyond.

The Fed’s consideration of this proves something that they and the Obama Administration deny, but manufacturers, farmers, retailers, and job seekers have been saying for months: The US economy is being battered by a recession. Policymakers pull out negative rates only when they feel that all other attempts to resuscitate an economy have run their course. It’s a last-ditch effort.  

It is believed by economists that an economy is enticed to grow under a negative interest rate scenario because banks are penalized for holding reserves and, therefore, are encouraged to lend in volume at lower rates and with looser reins. Allegedly, businesses intent on growing will take them up on that offer and investment in people, plant, and equipment.

You might be thinking that this makes no sense, because businesses aren’t keen on borrowing now, even at the incredibly-low rates enjoyed by our economy for the past half-dozen years. Businesses aren’t borrowing because the banks won’t let them; instead, they aren’t borrowing because their customers haven’t given them the incentive to grow.

That’s where a secondary domino effect of the policy is supposed to kick in. The banks will be forced into penalizing their clients for saving and a negative interest rate will be charged on all savings and checking accounts and certificates of deposit. You -- the average account holder – will be charged a fee for keeping your money in the bank. Policymakers believe that this encourages people to take their money out of banks and spend it, thus exciting the economy.

Any businessperson or head of household worth their salt will tell you that this is economic suicide. It was our nation’s corporations, banks, governments and consumers spending beyond their means and not saving that led to the economic collapse that fed the Great Recession. Here we are just eight years removed from the start of that horrific event and the “great minds” who are the puppeteers of our monetary policy and economy have magically forgotten that.

Japan and the Federal Reserve have warmed up to negative rates because it is believed that there were no negative repercussions from such practices in Europe. Give it time and there will be – as a matter of fact, Switzerland is already seeing an impact in the form of ballooning mortgage rates as desperate banks look for ways to actually make money.

What would negative interest rates do to the American economy? Would you really be spending more if you were hit with a penalty for saving? Many of you wouldn’t, and you would lose money for that very reason. What could you do with your money if you didn’t spend it? If you took it out of the bank, it’s certainly not safe under the proverbial mattress.

Simply put: It’s insane. Negative industry rates would be deadly if they worked according to plan and led people to blow their money. It would encourage the same behaviors that led to the economic chaos of 2008 and 2009. The US economy nearly died then. Its death would be certain this time around, as it’s patently obvious that we never recovered from that nightmare.

 From the 08 February Greater Niagara Newspapers