Comments on: Sweden: negative interest rates and quantitative easing

By: Scott Sumner

Scott Sumner — Mon, 06 Jul 2009 23:52:09 +0000

Mankiw and Buiter didn't exactly discuss negative interest on reserves, they proposed negative interest on currency, which isn't really technically feasible. Negative interest on reserves is feasible and I have advocated it for the Fed since last fall. In case anyone is interested, here is a post from my blog, which I entered after a long email back and forth with Mankiw on the idea.

http://blogsandwikis.bentley.edu/themoneyillusion/?p=1032

By: VG Chicago

VG Chicago — Mon, 06 Jul 2009 01:36:00 +0000

Hmmmmm.... and here I thought it was the Swedish model of handling this crisis that we all had to follow. Ah well, there goes another Euro-Lazy-Socialist theory out the window...

Now, how about microcredits for the Western world? Do we qualify yet as Third World nations?

Vinny G.

By: Kalpa

Kalpa — Sun, 05 Jul 2009 22:44:29 +0000

Nice article. I wrote an article on Seeking Alpha about negative interest rates, as well, about a month ago.
http://seekingalpha.com/article/141588-negative-interest-rates-can-solve-our-unsolvable-problem-of-debt-load
I don't really understand why people get so bent out of shape about this subject. I don't see it as any different than a reverse inflation. The system thrives on a mild currency loss, and however that can be obtained seems logical. I'm not advocating that ethically, just trying to imagine solutions to this current unethical mess we're in.

By: Martin

Martin — Sun, 05 Jul 2009 19:49:32 +0000

You missed one interesting piece of this story. I asked John Hempton of Bronte Capital about this: http://uk.reuters.com/article/idUKLH15490720090617 and the answer is basically that Handelsbanken has excess cash and no idéa where to put it.

But that can be interpreted as: we have banks that have bad loans and banks that have cash but cannot come up with any reasonable safe investment than to lend it to Riksbanken.

There is bad investment you can make or not make. Where is the good investment?

By: depresso

depresso — Sun, 05 Jul 2009 19:24:32 +0000

The problem is that Riksbank's definition of "normal" is abnomal.

By: ]{s

]{s — Sun, 05 Jul 2009 19:02:30 +0000

is this the central banks way of telling depositors to get their money out of the banks before they blow up when eastern europe does?

By: FairEconomist

FairEconomist — Sun, 05 Jul 2009 16:47:27 +0000

The Swedish approach is a very sensible one. Inflating produces economic benefits now, by averting a liquidity trap, at the cost of economic losses later, from inflationary distortions. The Fed policy of lending money to the banks so it can borrow it back at slightly higher rates does almost nothing to avert a liquidity trap while creating a staggering risk of high inflation later. The Swedish approach can end the liquidity trap immediately (assuming there's enough quantitative easing). There will be inflation, but it will happen quickly, and it will be the minimum to escape the liquidity trap. More benefit than the Fed strategy at less cost.

The Fed approach is geared to enriching real estate speculators (especially MBS-owning banks) rather than to averting depression. Given the political power of large financial institutions due to privately financed elections and extensive legal lobbying, this probably is intentional rather than accidental on the part of the Fed. It's certainly no surprise.

By: "DoctoRx"

"DoctoRx" — Sun, 05 Jul 2009 16:16:05 +0000

40 acres and a mule . . .
Give the people or small businesses direct grants, rather than the "spread" to the banks.

The Swedes are in bed with the Merchants of Debt like the rest of the industrialized world.

By: ben

ben — Sun, 05 Jul 2009 16:05:20 +0000

i don't think negative interest rates would really make sense in the US at the moment because the federal reserve is deliberately paying interest to sterilize their support of the banking system. if the federal reserve started penalizing reserves the fed would lose control of the target rate.

By: emca

emca — Sun, 05 Jul 2009 15:58:41 +0000

/"Punishing savers by lowering interest rates to zero and printing money is not going to solve the problem."/

The lack of savings does seem to be the crux of the problem as well as the many who do not see it as a problem.
It had been predicted before the situation turned so dire nations would follow the Japanese model of zero or near zero interest rates to ameliorate their fiscal woes, the dumping of cheap monies to rectify excesses and poor decisions of the past. So it appears now to be a (near, China?) universal means, as even Sweden will embark on this venture. Such might be the regiment of a World Trade economy that given the lack of consumer nations to "consume", producing nations suffer disproportionate consequence.

Sweden will bear watching in the coming years as the natural consequence of increased accumulation of monies in hard times is savings (or the reduction of debt) which would seem to be what the Swedish government is trying to prevent in hopes a short-term solution will bring long-term relief.