Welcome to negative interest savings
As if I didn’t have enough to worry about, Bank of New York Mellon has me stressing over whether interest rates will soon cross into negative interest territory.
I was astounded by reports last week that the bank has begun charging 0.13% on custodial cash balances averaging in excess of $50 million.
According to CNBC.com, that more than offsets what BNY pays for FDIC deposit insurance and indicates that it "believes that the demand … to hold wealth in cash is so great, clients are actually willing to pay money to stay out of other assets."
This was reported on the same day the Dow fell 512 points and 4-week Treasury bills temporarily traded at a negative yield.
Although Federal Reserve chairman Ben Bernanke surely didn’t like the stock plunge, BNY’s action must have provided him some ideas about further "easing" measures.
Undoubtedly, the problem for Ben is that BNY’s negative rate just isn’t big enough -- there’s just not enough shock and awe there.
To cope with all this, I’ve sought out the wisdom of the monetary policy cognoscenti (via Google search).
I’ve learned the Fed’s been trying to overcome something called "zero bound" for interest rates. That’s when the federal funds rate gets so low that policymakers have to scramble to avoid a "liquidity trap."
So far, the response to zero-bound rates has been the helicopter drop of money -- aka, quantitative easing.
As everyone knows (probably even, deep down, the Fed chairman), it hasn’t worked.
But maybe BNY has pointed a way to break through the zero-bound barrier.
Suppose the Fed could make it so exorbitantly expensive for savers to maintain deposit accounts, by imposing some cost on them (like a fee or tax), they’d have no choice but to bolt and invest in stocks and commodities?
That’s just what the doctor (Bernanke) ordered.
After all, he needs new asset bubbles to inflate, so we’ll think we’re actually wealthy.
This would be a variant of what the aforementioned cognoscenti apparently call "Gesell’s Solution" -- a tax on currency to ensure it’s circulated (spent) rather than hoarded (saved).
I’m sure Fed staffers are working overtime, rummaging through Bernanke’s "toolbox" to find authority, in some way, to push rates below zero.
Hopefully, they’ll discover the Fed can’t do anything without congressional action.
And, given the recent debt ceiling debate, we know the chances of that are about nil.
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