Former Central Banker William White on the Failure of QE, Danger of Negative Interest Rates

Yves here. William White (along with Claudio Borio), then of the Bank of International Settlements, is best known for having warned starting in 2003 of frothiness in numerous housing markets around the world and of being blown off by Greenspan.

What is interesting about this short talk isn’t simply the particulars of what White says but the degree of his intellectual migration. White has tended to think like an orthodox economist despite being willing to push at the margins. For instance, even after the crisis, he was a budgetary scold, warning of the dangers of too much government debt. As we’ve stressed repeatedly, excessive private debt, particularly household debt, is the big hazard; government debt is troublesome in and of itself only when the government does not control its own currency and when an economy is at full employment.

This video illustrates how empirically-based economists like White are starting to reject significant elements of mainstream thinking. White at the very top of his short remarks repudiates the over-relliance on monetary policy, and later on, as politely as a Serious Economist can, waves big red flags about the current enthusiasm for negative interests rates. White points out they could result in the perverse result of banks charging more, not less, to borrowers. He still can’t quite stop worrying about government debt, but you’ll see his recommendations at the end, to a very large degree, are for foursquare “fix the real economy” measures to stimulate demand and raise worker incomes.

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  1. Disturbed Voter

    The lack of concern for the build up of private debt … is directly reflective of the bigotry of the Elite toward small business and workers. Let them eat iPads.

  2. JR

    I was wondering about negative interests rates and thought I would throw some thoughts out here… Aside from interesting questions relative to whether the Federal Reserve has the legal authority to impose negative interest rates on excess reserves, I was wondering whether negative interest should be seen as another transfer payment (eg subsidy) from the population to the banking sector and whether negative interest runs counter to QE.

    Seems to me cash inherently has a negative carry (owing to the need for IT systems, systems maintenance, real estate, salaries, etc.). Coming at this from a different angle then, interest is compensation for the use of money and that interest offsets cash’s negative carry. Therefore if the spread earned between funds on deposit and those funds on loan becomes too narrow, depositors will be forced to come up with the difference (banks will argue it is to pay for the service of lending them one’s money). So, if negative interest rates are imposed on IOER, and banks are able to transfer those costs to depositors, this will represent a source of funds provided by the population to the banking sector. Ostensibly, one could say this could promote systemic stability, as these funds should funnel into retained earnings and boost Tier One, but I recall (likely incorrectly) seeing reports in the blogoshpere to the effect that the London Whale was playing with internal risk-adjusted capital backstopped by the excess of deposits over loans …

    Further, I was wondering whether negative interest rates signify an acknowledgement that QE did not work. Ostensibly, negative interest means I pay a bank to take my money. Therefore money goes out of circulation b/c banks can’t lend the money and continue to have the problem of an excess of deposits over loans. However, the banks will have more excess reserves. Isn’t the point of QE to provide a wall of liquidity that washes over the economy? If so, it seems that negative interest rates produce the exact opposite effect and will, in practical terms, drain liquidity from the system, as the excess reserves will remain locked inside the banks, and not make it out into the economy. IOW, more of the same QE fail, but also won’t the practical effect be to drain money from the economy? If so, wouldn’t that be another policy fail?

    Also, if I pay negative interest, that means I have less money to spend. The thought here is that rather than do that, I will buy cheap trinkets. Bully for aggregate demand! OTOH, there is only so much I can buy, so I will end up paying negative interest. System-wide, that can’t be good for aggregate demand. Also, is this why many serious people are now saying that the economy should go cashless?

    Anyhow, apologies in advance for flaws obvious to those more expert, and thanks in advance for anything that moves my thinking forward.

    1. Paul Greenwood

      It is confusing how a Bardepot System such as Germany operated 1972-1974 or Switzerland is beneficial internally. Major corporations have floats and idle reserves but SMEs have temporary floats which come within the scope of negative interest so they might be indebted to their banks through loans and overdrafts but have obligations to maintain cash floats as counterbalancing items. Under this situation they will go further into debt.

      If this Cashflow Squeeze results in higher unemployment as costs are cut or a refusal to hire additional labour then the transfer of real resources to the financial sector continues unabated. It is yet more focus on the FIRE sector to the detriment of the real sector

  3. Praedor

    QE is failing because the money is going into a black hole, big banks, with absolutely no rules or stipulations on the use of the money. As a result, the banks simply hoard the money. Thus the money pumped in is useless to the larger economy because the banksters are simply sitting on their piles of cash. If you are going to do QE then it needs to either be targeted to the people more directly – THEY will use the money to buy things, pay down debts, etc, and actually pump up the economy OR you have to put rules on the banks that REQUIRES them to loan out the money, NO PARKING IT.

    I prefer the former rather than the latter as it would be vastly more effective, and almost immediate in effect.

    1. templar555510

      Quite right – People’s QE in fact . But in order to do it a new vehicle like the Bank of North Dakota would be needed because the banking oligarchs won’t allow it . Yes I mean ‘ allow ‘ .

  4. Pepsi

    If even William White, the evil mirror universe counterpart of our man, Bill Black, says it, it must be too true to ignore.

    1. diptherio

      I think Will White and Bill Black should team up to pursue financial criminals and dunder-headed economists, super-hero style. They could have their own show after Law and Order (it would be called “Black and White,” of course).

      1. craazyman

        all they need is a character named Grey to the villain.

        Sebastian Grey (sorry if anybody is really named that, I just made it up). Dr. Sebastian Grey, PhD, CCC, AA, BYOB the former head of a global bank, then central banker, and now with his own free-market think tank.

        This could be like Batman!

        1. miamijim

          How about their evil counterparts Drs. Red, White & Blue!! All PHd’s in the classical school FUBAR. Constantly trying to manipulate monetary policy for personal gains???

        2. Massinissa

          Yeah, like that comic where Batman and the Ninja Turtles teamed up. (That really was a real things).

          I assume White is the Ninja Turtles. Cowabunga! The deficit is too high! PIZZA!

  5. MikeNY

    Good vid. ‘Paradigm shift’ is exactly right, or as Grantham says, ‘regime change’.

    Is it possible to pry the eyes of Mrs Magoo & Co. away from their mathematical map for a few moments, before they drive us all over the cliff?

    1. Jim Haygood

      This is very timely question, with the 10-year Treasury note having shed 32% of its yield since the Fed’s notorious ‘policy error meeting’ began on Dec 16th.

      From 2.30% to 1.57% in less than two months: it’s becoming one of the fastest yield collapses in Treasury history, in percentage terms.

      Ms Market to J-Yel: Are ya scared yet, b*tch? Well, are ya?

      *hands J-Yel a handkerchief to wipe the egg off her face*

      1. Tinky

        She’s gonna need a bigger handkerchief. This was from today’s testimony:

        “Evidence suggests that expansions don’t die of old age”

      2. Skippy

        Yellen is just a late understudy thrust upon the stage, tho she cannot undo what Greenspan and Ben wrought, so now its a game of pass the parcel…

        Skippy…. that’s what you’ll get when ideologues with deep pockets play games for a few decades Jim.

        PS. hows things going in socialist Texas, N. Dakota, et al…

      3. craazyboy

        J-Yell is sitting on huge treasury bond profits. She could sell ’em off and make a trillion. Be the greatest bond trader of all time.

  6. Tinky


    You’ve forgotten more about economics than I’ll ever know, but even taking your qualifications into account, I am unable to fully comprehend your perspective on Government debt.

    Perhaps, using the U.S. as an example, you can explain how $19 trillion (and rising rapidly) of debt, coupled with somewhere between $100 and $200 trillion of unfunded liabilities, can possibly be repaid – ever? Or, if your argument is that it doesn’t need to be repaid, then please explain how faith in the currency could possibly hold?

    Thanks in advance.

    1. Ranger Rick

      The short answer is that the US sovereign debt, isn’t, and never has to be repaid in the sense that you would repay a loan. The question “what is a debt and a liability on a balance sheet?” is very relevant, as would the analogy that your savings account is a debt/liability of your bank.

      1. Tinky

        Thanks, but is really doesn’t answer my question. If the debt reaches a certain, unsustainable level, the result is a likely loss of confidence in the currency. So, given the certainty that U.S. debt levels will soar far higher (how else could the unfunded liabilities possibly be covered?), how might this huge and growing debt not, ultimately, prove to be disastrous in connection with the health of the Dollar?

          1. Tinky

            Thanks, I’m superficially familiar with MMT, and should explore further. Having said that, I remain skeptical of the “debt doesn’t matter” claim.

            1. Nobody (the outcast)

              I’m no expert but…

              Debt does matter for you and I and firms and local governments, but it is pretty insignificant for the U.S. Government. As others have suggested, study some MMT. Warren Mosler’s 7 Deadly Innocent Frauds of Economic Policy has a pretty simplistic but accurate description. WRT to USG debt, there is no “solvency risk.” So in that sense, the size of the debt does not matter. The way it could matter is that if it got so big (so much USG spending) that there would be “too much money chasing to few goods and services” inflation. This is the only real problem with “too much” USG “debt.” And as there is un/under-employment and other idle resources, we are not anywhere close to that now.

              You can forget about hyper-inflation until U.S. economic productivity collapses and the USG spends with very little to no productivity to show for it or it spends after it completely loses the ability to collect taxes. The chances of those things happening are infintesimal.

              Anyway, how money is spent and the types of production resultant from that spending in our economy (war, for-profit prisons, for-profit healthcare and environmental destruction/degradation being my pet peeves) is way more of a problem than the amount of spending, IMO.

                1. Nobody (the outcast)

                  I added that to appease another commenter named nobody (lowercase) because nobody did not want anyone to confuse me with her(?). It is a reference to a film character named Nobody who was an actual outcast. I am more of a self-exile from society at large.

        1. tegnost

          trees don’t grow to the sky. Everything can be fixed by price, right now we have chosen winners, but those winners are counting on a dollar for a dollar, but as Mr White say “that’s not on the table”. Unfunded liabilities is nothing more than a talking point, the world keeps spinning around. The health of the dollar is not the end of all things, it’ simply marks a place on a relative scale that will continue changing. Finally, disastrous for who? If those who face that disaster don’t acknowledge they need more flexibility then the sooner the better IMO.

          1. Tinky

            I agree, and have positioned myself based on my understanding of where the U.S., and the world, are heading.

        2. Left in Wisconsin

          One way to avoid panic is to think relatively, not absolutely. All the people who say that growing debt HAS TO ultimately undermine the USD need to think about where all those people abandoning the dollar are going to park their assets – the yuan? the Euro? the yen? If every country has “unsustainable” levels of debt, do all the currencies crash together? How does that work?

          You don’t have to outrun the lion. You only have to outrun the slowest other runners.

          1. Tinky

            With respect, there are very big players already turning their backs on the Dollar. If you believe that it will remain the fastest of the runners for a long time to come, I wish you luck.

            1. Left in Wisconsin

              If they are turning their backs to USD because of incipient hyperinflation, good luck to them. And I presume they are way up over the last decade.

        3. financial matters

          Debt needs to be used wisely.

          Bill Mitchell uses most of this article to explain how to use a sovereign currency to deal with unemployment but also includes this caveat on current account deficits.

          Balance of Payment Constraints

          ” CAD means that real benefits (imports) exceed real costs (exports) for the nation in question.

          This is why I always say that the CAD signifies the willingness of the citizens to ‘finance’ the local currency saving desires of the foreign sector.

          MMT thus turns the mainstream logic (foreigners finance our CAD) on its head in recognition of the true nature of exports and imports.

          Subsequently, a CAD will persist (expand and contract) as long as the foreign sector desires to accumulate local currency-denominated assets.

          If they lost that desire entirely, then the CAD gets squeezed down to zero. This might be painful to a nation that has grown accustomed to enjoying the excess of imports over exports. It might also happen relatively quickly. But at least we should understand why it is happening.”

    2. reslez

      In the MMT view, government as the issuer of currency cannot “run out” of money. Government debt can always be repaid. The US government has run deficits throughout most of its history; if government debt has not been a problem for 200 years the burden is on scaremongers to explain why right now is any different.

      The US runs a trade deficit with the rest of the world. In sectoral balance terms this means the government must run a budget deficit, or else the private sector must go increasingly into debt, or the economy will tank. The budget deficit is like a thermostat on the economy, it is an indication of what’s happening in the economy and it cannot be directly controlled. Austerity has taught us for 8 years that trying to cut the deficit drains money from the private sector and tanks the economy even further, and thereby increases budget deficits further! To improve the deficit, improve the economy. This improves tax revenue and decreases budget spending all by itself.

      Another short MMT answer is that $19 trillion of debt is identical to $19 trillion of savings bonds in the hands of the private sector (or other world governments). If the government were to pay off this debt the private sector would need to find an equally safe alternative investment vehicle — which is not at all easy to identify. Governments are not a household or a business and have no intrinsict need to balance a budget. We’re more in danger of deflation at the moment, not inflation. Explain why we should be so worried about inflation that we avoid needed infrastructure improvements and strain an already shaky economy. (No other entities “pre-fund” liabilities 70 years in the future, this is just plain budgetary scaremongering by people who hate spending in the public interest.) Wray or any of the other writers and NEP can explain all this better. You can also check out Mosler’s Seven Deadly Innocent Frauds of Financial Policy for a primer.

      1. Fiver

        The real problem not being recognized, though, is that for both all US domestic debt and for global debt the presumed performance for real growth on an order required for debt at these levels to “work’ is just not going to be there, and ‘not there’ by an enormous amount more with each passing year.

  7. Keith

    There is more than one version of Capitalism, and today’s version is an upside down version of the one we had 40 years ago that produced the lowest levels of inequality in history within the developed world.

    When main stream economists are using upside down economics the chances of them coming up with a working solution are zero.

    All the Central Bank stimulus programs have been Neo-Keynesian, in line with the new economics. The money is pushed into the top of the economic pyramid, the banks, and according to the new economics it should trickle down.

    What we have seen is that the money stays at the top inflating asset bubbles in stocks, fine art, classic cars and top end property.

    Which way is up?

    Is today’s economics upside-down?

    40 years ago most economists and almost everyone else believed the economy was demand driven and the system naturally trickled up.

    Now most economists and almost everyone else believes the economy is supply driven and the system naturally trickles down.

    Economics has been turned upside down in the last 40 years.

    Let’s have a look at things from the perspective of the old economics.

    How is the global consumer these days?

    1) The once wealthy Western consumer has had all their high paying jobs off-shored. As a stop gap solution they were allowed to carry on consuming through debt. They are now maxed out on debt.

    2) Japanese consumers have been living in a stagnant economy for decades.

    3) Chinese and Eastern consumers were always poorly paid and with nonexistent welfare states are always saving for a rainy day. Western demand slumped in 2008 and the debt fuelled stop gap has now come to an end.

    4) The Middle Eastern consumers are now too busy fighting each other to think about consuming anything and are just concerned with saying alive.

    5) South American and African consumers are busy struggling with economies that are disintegrating fast.

    No demand, no surprise.

  8. Keith

    “Debt, the first 5,000 years” David Graeber

    An ongoing tale of greed, stupidity and the enslavement of the many to the few.

    After 5,000 years you would think we might have got the hang of it.

    In ancient times they accepted that debt always got out of control and had Jubilee years every seven years where all debt was forgiven (before society is too badly affected).

    Today we are trying to kid ourselves we know what we are doing, hence the “extend and pretend” for Greek and other debt.

    Let’s pretend it is all going to be paid back and if everything collapses on the way, never mind.

  9. steelhead23

    Great vid. Yves, your intro of Mr. White’s conversion to a more Keynesian view is an indication of his high intelligence. All of us tend to cling too long to our long held beliefs and assumptions (our book so to speak) – as is abundantly clear in the inability of mainstream macroeconomists to even understand the work of our heterodox friends, empirical evidence notwithstanding. I hope the globe’s monetary and fiscal policy leaders drop their “book” soon because the crisis is upon us.

    1. JustAnObserver

      Has anyone out there in Econ/Fin land compiled a list of the those economists who have, in the face of overwhelming evidence against the neoliberal orthodoxy, made this conversion. Either in view of the “events” of the 2008 (and continuing) financial crisis or even significantly before.

      Prediction: This list is likely to be very short. Does it even make it to double digits ?

  10. rich

    Wednesday, February 10, 2016
    What Policy Makers Learned at Davos

    1. With negative rates
    2. People will need to rush to yield
    3. Which can only be met by the greed and leverage PEU boys

    4. Who soon will have investments for unaccredited investors.

    5. Those same PEU boys sponsor our elected officials

    6. And hire captured policy/regulatory high ups
    7. After their “public service.”

    Get the picture. They screw us to enrich themselves.

  11. Jerry Hamrick

    So debt comes from deficit spending? And deficit spending is when the government spends more money than it is taking in? And when the government sells bonds it is borrowing money? So, the only way for government to ever zero the debt is to tax the people, or sell off assets?

    I thought our lack of money was due to to the fact that we still think we are on the gold standard. I see that I was wrong.

    When we were on the gold standard we could only issue a certain number of dollars per ounce of gold, or some other metal. This meant that there was an actual limit to the money we could issue, and to protect our gold, to hoard gold in other words, the debt limit law was passed about a century ago. But in 1933 we got off the gold standard so didn’t that mean that we had all the money we could use? And we could spend more on education and infrastructure couldn’t we? That would be good for the country and wouldn’t be inflationary either, or would it? There would be a natural limitation to this approach–we would be limited by equipment, planning, raw materials, technology, trained people, and the like. But that would not be inflationary would it?

    If that is so, then we must be limited by something natural. We can’t give everyone a million a year. But we could stop collecting taxes. That would be a way to get money into everybody’s hands. We could double the minimum wage, that would help get money to the people wouldn’t it? And we could just pay off the debt we are carrying now couldn’t we? Maybe paying off the debt that we have right now would be too great an injection of money into the system. Maybe we should just pay it off over the next century. That would work, wouldn’t it? So why is this guy worried about debt?

  12. polecat

    because this guy (mr. White) is ALREADY vested within his sinecures, and now, as a FORMER cental bankster, can say whatever he wants, because he is set !!!!!!!

  13. Amateur Socialist

    Hey a thought occurs: Now that we have entered this new era of negative interest rates can I get a refi on my mortgage that pays a dividend instead of charging me interest? No?

  14. RBHoughton

    “government debt is troublesome in and of itself only when the government does not control its own currency.”

    That sentence from Yves should be made a prayer that every central banker recites on arising and retiring.

  15. Fiver

    White is getting a lot of play lately, and I find with each reading or interview, he seems to me to be telling us a whole bunch of reasons why we have very few options in certain circumstances, and invariably its due to the way some proposed policy would be defeated by its accounting treatment. For instance, if we simply printed money and gave it to every household to spend, this would still show up in the national accounts as a liability or debt. There is no such thing in White’s world as ‘thinking outside the box’ so far as to engage in any sort of serious system reform – or just winging a one-off, like printing up some money, distributing it and make no changes to the national accounts. Or, heck, there’s always the option of adopting reasonable rates of taxation, corporate re-regulation and taxation, and a return of the Government as provider of the necessary conditions for healthy mixed economies.

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