Latest / Trumponomics / Episode 25: Negative Rates -- Another (Delayed) 2008 Hangover

Transcript

Episode 25: Negative Rates -- Another (Delayed) 2008 Hangover · Trumponomics

• 0:00
  Speaker 1: People want to know what the men can do in
• 0:02
  Speaker 1: case all hell breaks loose in the U. S economy. Essentially,
• 0:09
  Speaker 1: this episode is brought to you by Nadex, the Binary
• 0:12
  Speaker 1: Options Exchange. Binary Options let you limit your risk and
• 0:15
  Speaker 1: trade stock in dissees, commodities for x and more from
• 0:18
  Speaker 1: a single account. Nat X is a CFTC regulated exchange
• 0:22
  Speaker 1: with transparency, free market data, and fairness guarantee. The future
• 0:26
  Speaker 1: of trading is here now at n A d e
• 0:29
  Speaker 1: x dot com, futures options and spots. Trading involves risk
• 0:32
  Speaker 1: and may not be appropriate for all industrial Hi am,
• 0:41
  Speaker 1: welcome back to Bloomberg Benchmark, a podcast about the global economy.
• 0:45
  Speaker 1: It is Thursday, February eighteen. I'm Tory Stiwell and economics
• 0:49
  Speaker 1: reporter with Bloomberg News in DC, and I'm joined by
• 0:52
  Speaker 1: my co Hostito, the acting Tokyo Bureauci and Dan Moss
• 0:57
  Speaker 1: are executive editor for International Economics News in New York. Killo, everyone.
• 1:03
  Speaker 1: So today we are going to talk about a concept
• 1:07
  Speaker 1: that has been an almost inescapable topic in financial news,
• 1:11
  Speaker 1: and that is negative interest rate policies a k A
• 1:14
  Speaker 1: and n r P a k A nerp AK interest
• 1:18
  Speaker 1: rates below zero I prefer nerve out of all of those.
• 1:21
  Speaker 1: I think it has a nice ring to it. We've
• 1:24
  Speaker 1: gone from zup to ner to tarp their nerve, all
• 1:28
  Speaker 1: the acronyms that we love. Basically, it's a policy tool
• 1:31
  Speaker 1: that until a couple of years ago, was extremely UNORTHODOXUS.
• 1:35
  Speaker 1: Now it's still unorthodox, book becoming less so because some
• 1:39
  Speaker 1: central banks are using it now to stimulate their economies
• 1:43
  Speaker 1: because they're more or less out of other tools to
• 1:46
  Speaker 1: support their economies using more traditional methods. So on January
• 1:50
  Speaker 1: twenty nine, the Bank of Japan joined a couple of
• 1:54
  Speaker 1: these other central banks in deploying a negative interest rate.
• 1:58
  Speaker 1: So it is now part of Tory's favorite NERT club,
• 2:02
  Speaker 1: along with the central banks of the year Zone, Sweden, Denmark,
• 2:07
  Speaker 1: and Switzerland. And the policy in Japan just went into
• 2:11
  Speaker 1: effect this week, so that makes it the perfect time
• 2:14
  Speaker 1: of act about it. Yeah, and I also get the
• 2:16
  Speaker 1: sense achy that it was a tipping point in terms
• 2:20
  Speaker 1: of the popular narrative of negative interest rates until the
• 2:24
  Speaker 1: bo J decision, there was a feeling that it was
• 2:27
  Speaker 1: a thing that the Scandinavian countries did and that the
• 2:30
  Speaker 1: e c B did, but that they were real outlies
• 2:34
  Speaker 1: and while you and our team in Tokyo were prepared
• 2:37
  Speaker 1: for a surprise from the Bank of Japan, it sure
• 2:40
  Speaker 1: wasn't this one. What it's done is it's taken the
• 2:44
  Speaker 1: negative interest rate question away from like, oh, we've got
• 2:47
  Speaker 1: five questions for Janet Yellen, let's add that one too,
• 2:50
  Speaker 1: pretty much the first thing FED officials are asked about.
• 2:54
  Speaker 1: And when Bill Dudley confronted this issue the other day,
• 2:58
  Speaker 1: he seemed a bit frustrated to be const stantly hearing it.
• 3:02
  Speaker 1: And you know, people in Congress have picked up on
• 3:05
  Speaker 1: this idea, and Chay Yellen was peppered with questions about
• 3:08
  Speaker 1: this last week. I just really get the sense that
• 3:11
  Speaker 1: psychologically Japan changed the game on this. That's right. But
• 3:15
  Speaker 1: before we get too far, we're going to start out
• 3:18
  Speaker 1: with a basic discussion of what negative interest rates even
• 3:21
  Speaker 1: are and how exactly they work. And for that we
• 3:24
  Speaker 1: are welcoming Karen Sho Patrow, who's here in d C
• 3:28
  Speaker 1: with me. Karen is co founder of Federal Financial Analytics.
• 3:32
  Speaker 1: Her firm advises financial services firms on political and regulatory risk,
• 3:37
  Speaker 1: and negative interest rates certainly could fall into that category. Karen, welcome,
• 3:42
  Speaker 1: Thanks very much. Story so let's start with just a
• 3:45
  Speaker 1: very basic definition and explanation of what negative interest rates are,
• 3:50
  Speaker 1: because it is a pretty topsy turvy concept to think about,
• 3:53
  Speaker 1: just like how we deposit our extra cash in a
• 3:56
  Speaker 1: bank and the bank pays us interests. Banks themselves have
• 4:00
  Speaker 1: their own bank to park their excess money, which is
• 4:02
  Speaker 1: the central bank or the Federal Reserve for us, and
• 4:05
  Speaker 1: policymakers can move the interest rate they pay up or
• 4:08
  Speaker 1: down right, hockey right, And so we don't confuse everyone.
• 4:13
  Speaker 1: These are a lot of different kinds of interest rates.
• 4:15
  Speaker 1: This isn't the same interest rate as the benchmark interest
• 4:19
  Speaker 1: rate that we talked about in one of our previous
• 4:21
  Speaker 1: episodes on the set. So if you recall that bank
• 4:25
  Speaker 1: park interest rate is the rate that bangs borrows from
• 4:28
  Speaker 1: each other overnight. This interest rate that we're talking about today,
• 4:32
  Speaker 1: which is sometimes called the deposit rate, sometimes called the
• 4:35
  Speaker 1: interest on excess reserves, is the rate that central banks
• 4:38
  Speaker 1: pay commercial banks to keep cash parked at the central bank. Yes,
• 4:43
  Speaker 1: and a negative interest rate here means that a commercial
• 4:46
  Speaker 1: bank actually pays the central bank a fee to deposit
• 4:49
  Speaker 1: money there. They're being punished for keeping too much money
• 4:52
  Speaker 1: sitting idle. Instead of lending it out or doing something
• 4:55
  Speaker 1: else useful with it. But you know, totally by making
• 5:00
  Speaker 1: depositors pay money. That's right. So, Karen, why would a
• 5:05
  Speaker 1: central bank want to do something so strange like this?
• 5:08
  Speaker 1: What's the goal? What are the theoretical pros and cons
• 5:12
  Speaker 1: of this policy? Well, I think, as Aki said, it's
• 5:16
  Speaker 1: a very um crazy, topsy turvy idea to force banks,
• 5:22
  Speaker 1: and if that happens to banks, sooner or later, it
• 5:26
  Speaker 1: happens to all of us as depositors to pay our
• 5:29
  Speaker 1: banks to take our money. And the only reason the
• 5:33
  Speaker 1: central banks in other countries, including Japan, went below what's
• 5:38
  Speaker 1: called zero lower bound was because they really couldn't think
• 5:42
  Speaker 1: of anything else to do in hopes of stimulating economic growth.
• 5:49
  Speaker 1: One of the most surprising effects of the crisis, combined
• 5:53
  Speaker 1: with all of the really, really difficult economic circumstances we've had,
• 5:59
  Speaker 1: is that central bank monetary policy tools are increasingly blunt.
• 6:04
  Speaker 1: All the things they know how to do didn't work well.
• 6:08
  Speaker 1: And now central banks have thrown trillions of dollars in
• 6:12
  Speaker 1: what's called quantitative easing. They bought trillions of dollars. I
• 6:15
  Speaker 1: read the other day twenty three trillion dollars of assets.
• 6:19
  Speaker 1: Global assets are now housed in central banks, and that's
• 6:24
  Speaker 1: an amazing number. And even that's not enough. So this
• 6:27
  Speaker 1: is sort of like you know the picturing the DC
• 6:31
  Speaker 1: Metro here, and we have the boxes in the cars
• 6:35
  Speaker 1: where you have like the glass and you pull down
• 6:37
  Speaker 1: a lever in case there's like a giant emergency. That's
• 6:40
  Speaker 1: what nerve is for central banks, so much less cateachorismic,
• 6:46
  Speaker 1: and I call it a hail Mary pass, but in
• 6:50
  Speaker 1: a way having circumstances driven them to a hail Mary pass.
• 6:55
  Speaker 1: One consistent feature of the post two thousand a night
• 6:58
  Speaker 1: landscape has been the complete absence of inflation. Many people
• 7:03
  Speaker 1: said that all this quantitative easing would produce loads of inflation.
• 7:08
  Speaker 1: In fact, the opposite is happening. So shouldn't the central
• 7:11
  Speaker 1: banks keep swinging even though they cut rights to zero?
• 7:16
  Speaker 1: I think one of the things we need to think
• 7:18
  Speaker 1: through and we don't know the answer to yet. But um,
• 7:22
  Speaker 1: I'm doing a lot of work on this actually right now,
• 7:24
  Speaker 1: because I think the swinging that that could keep swinging.
• 7:28
  Speaker 1: The other central banks could keep swinging. But finance has
• 7:32
  Speaker 1: changed a huge amount in the wake of the crisis,
• 7:35
  Speaker 1: and every one of the central banks we've talked about
• 7:38
  Speaker 1: traditionally executes monetary policy principally through banks, and banks are
• 7:44
  Speaker 1: very different institutions than they were from the crisis. There
• 7:47
  Speaker 1: are a lot better we hope they're better capitalized, but
• 7:52
  Speaker 1: they don't interact with the economy in the way they
• 7:57
  Speaker 1: used to US. Banks right now hold well over two
• 8:01
  Speaker 1: trillion dollars of excess reserves at the FED, and it's
• 8:07
  Speaker 1: largely because they don't know where else to put them.
• 8:12
  Speaker 1: So the goal of negative interest rates, then would be
• 8:17
  Speaker 1: to force banks to keep less cash on hand and
• 8:20
  Speaker 1: lend more of it out, you know, to consumers who
• 8:24
  Speaker 1: would spend it, or to companies who want to finance things,
• 8:28
  Speaker 1: build things by equipment, do whatever. Um. So, I guess
• 8:32
  Speaker 1: the goal is to just stimulate the economy more. That's
• 8:36
  Speaker 1: been paying banks a very low rate of return on
• 8:39
  Speaker 1: the excess reserves if it went negative, and this is
• 8:42
  Speaker 1: exactly why the Bank of Japan went negative. It's basically
• 8:46
  Speaker 1: kicking the kid out the front door and saying get
• 8:49
  Speaker 1: a job. Yeah. And let's also remember, you know, something
• 8:54
  Speaker 1: that thank Japan Governor Corona has been talking about is
• 8:59
  Speaker 1: that this is going to bring down borrowing costs um
• 9:03
  Speaker 1: for everything. Um, you know the ten year Japanese government bond,
• 9:09
  Speaker 1: you know those went in negative territory of US week
• 9:12
  Speaker 1: that we talked about a little bit um. So this
• 9:15
  Speaker 1: makes borrowing cheaper for everyone, for the companies, for consumers,
• 9:19
  Speaker 1: and the hope is this will for more people to
• 9:23
  Speaker 1: spend money. As contentious as it's been, Corona is not
• 9:27
  Speaker 1: exactly a babe in the woods easy key. Yes. But
• 9:31
  Speaker 1: then I think that's a great question. I think that's
• 9:34
  Speaker 1: something that we're all asking ourselves right now. This was
• 9:37
  Speaker 1: something that very very few people were expecting um before
• 9:42
  Speaker 1: the Bank of Japan actually announced the policy in January.
• 9:45
  Speaker 1: And you know, kind of the funny thing is when
• 9:47
  Speaker 1: the news first broke on the Bank of Japan, my mom,
• 9:51
  Speaker 1: who's Japanese and she lives in Tokyo, she texted me
• 9:54
  Speaker 1: and she was like, oh my gosh, this sounds like
• 9:56
  Speaker 1: a terrible thing. I hate it, and sent me these
• 9:59
  Speaker 1: angry and those, and after after the best settled, I
• 10:05
  Speaker 1: was explaining to her that this doesn't necessarily mean that
• 10:08
  Speaker 1: she herself is going to have to pay money to
• 10:11
  Speaker 1: keep money at her own bank. This, you know, is
• 10:15
  Speaker 1: something that applies to commercial banks keeping money at a
• 10:18
  Speaker 1: central bank. UM. But Karen, could you talk about how
• 10:22
  Speaker 1: this policy would theoretically impact consumers with my mom, that's
• 10:27
  Speaker 1: a great question right now. For the most part, in
• 10:32
  Speaker 1: Europe UM, where negative rates have been in place for
• 10:36
  Speaker 1: the longest amount of time, you've got a really difficult
• 10:40
  Speaker 1: dilemma because the banks are still paying their depositors really
• 10:44
  Speaker 1: tiny amounts of interest to keep funds in the bank.
• 10:49
  Speaker 1: But it's only because rates haven't gone super super low
• 10:54
  Speaker 1: and because they really fear that if depositors had to
• 10:59
  Speaker 1: actually pay the lost of the negative interest rates. The
• 11:01
  Speaker 1: banks are bearing depositors which just take their money and leave,
• 11:07
  Speaker 1: just keep it under their mattress, keep it under their mattress. Uh,
• 11:12
  Speaker 1: spend it, maybe the way the Fed wants, but perhaps
• 11:15
  Speaker 1: in sudden uncertain ways. There's been speculations some people might
• 11:20
  Speaker 1: put it into bitcoin. Uh, money market funds. I mean,
• 11:24
  Speaker 1: there are a lot of places in markets to put money.
• 11:27
  Speaker 1: And that's especially true in the United States, where we
• 11:30
  Speaker 1: have a very active non bank equivalent of deposits like
• 11:35
  Speaker 1: money market mutual funds. So the banks are basically in
• 11:41
  Speaker 1: one way, frustrating central bank policy by still paying depositors
• 11:46
  Speaker 1: a little bit. But in another sense, they're desperately trying
• 11:50
  Speaker 1: to cling to their fundamental purpose, which is taking deposits
• 11:54
  Speaker 1: and making loans. Right because if they if they begin
• 11:57
  Speaker 1: to charge this interest rate, people just won't deposit money
• 12:02
  Speaker 1: with them. Um. And I guess that brings us to
• 12:05
  Speaker 1: naturally to kind of the cons of negative interest rates.
• 12:08
  Speaker 1: What could go wrong here? What has been something or
• 12:12
  Speaker 1: what have been a few things that people have been
• 12:14
  Speaker 1: worried about with negative interest rate? And I think cash
• 12:17
  Speaker 1: hoarding is sort of one of the chief concerns here,
• 12:19
  Speaker 1: both on the part of consumers as well as a
• 12:23
  Speaker 1: commercial banks who obviously have a lot more cash to hoard. Uh,
• 12:27
  Speaker 1: it seems kind of dangerous if they just keep it
• 12:31
  Speaker 1: all in a vault. So where how does that even work?
• 12:33
  Speaker 1: A really big mattress. I do think what really worries
• 12:39
  Speaker 1: me the most about negative interest rates is how fundamentally
• 12:43
  Speaker 1: it changes the structure of economic growth, of taking deposits
• 12:49
  Speaker 1: and making loans, of financial intermediation. Do you really trend
• 12:53
  Speaker 1: that on its head? You now depositors pay bankers and
• 12:57
  Speaker 1: bankers pay borrowers, Well, how does that really work? After
• 13:03
  Speaker 1: just a few months maybe it's a short term shock,
• 13:07
  Speaker 1: but you're really fundamentally altering the role of banks, empowering
• 13:12
  Speaker 1: perhaps other forms of financial intermediation again, like mutual funds
• 13:18
  Speaker 1: buying lots of bonds. I don't know, nobody knows. That's
• 13:22
  Speaker 1: a great point. Well, now that we have a semi
• 13:25
  Speaker 1: form handle on what negative interest rates are, we can
• 13:28
  Speaker 1: head into the second part of the show, which is
• 13:31
  Speaker 1: all about the countries that are actually using them and
• 13:34
  Speaker 1: the results that they've gotten. After a word from our sponsor,
• 13:49
  Speaker 1: what do traders want to limit risk, access every opportunity
• 13:52
  Speaker 1: and trade on a level playing field. Nate x binary
• 13:55
  Speaker 1: options let you set your maximum profit and loss before
• 13:58
  Speaker 1: the trade, so your risk is always limit it. Find
• 14:00
  Speaker 1: opportunities in multiple markets, stock indussees, commodities for US, even
• 14:04
  Speaker 1: economic numbers, and Bitcoin, all from one account and platform.
• 14:08
  Speaker 1: Nt X is a CSTC regulated exchange with transparency, free
• 14:11
  Speaker 1: market data, and fairness guaranteed innovations of financial industry needs
• 14:16
  Speaker 1: and need X already has. That's why we think binary
• 14:19
  Speaker 1: options are the future of trading, and it's here now
• 14:22
  Speaker 1: at an a d e X dot com Futures options
• 14:25
  Speaker 1: and swaps. Trading involves risk and may not be appropriate
• 14:27
  Speaker 1: for all investors. So we should probably have at least
• 14:40
  Speaker 1: some discussion about what the outcomes have been on those
• 14:44
  Speaker 1: countries that have adopted negative interest rates. Now it's a
• 14:48
  Speaker 1: relatively recent phenomena given Karen, as you said, it essentially
• 14:53
  Speaker 1: upends the economic model. But are there any preliminary lessons
• 14:57
  Speaker 1: we can learn? And I guess we're really talking about
• 15:00
  Speaker 1: Scandinavia in the Eurozone here. I think the preliminary lessons
• 15:06
  Speaker 1: are mostly, in my mind, drawn from the Eurozone because Scandinavia,
• 15:11
  Speaker 1: for example, Sweden and are very unusual. In Sweden, for example,
• 15:15
  Speaker 1: almost nobody uses physical cash, so the impact of negative
• 15:20
  Speaker 1: rates on deposits is very different than it would be
• 15:23
  Speaker 1: in the United States or Japan or the Eurozone. And
• 15:27
  Speaker 1: the biggest takeaway I see so far, and why I
• 15:32
  Speaker 1: think negative rates are such a tremendous threat to financial
• 15:35
  Speaker 1: stability if they stay long enough and go deep enough,
• 15:39
  Speaker 1: is that it's having a combination of not really promoting
• 15:44
  Speaker 1: economic growth. The Eurozone is still bumping along the bottom,
• 15:48
  Speaker 1: and it's making banks weaker and weaker. They just cannot
• 15:53
  Speaker 1: keep paying for the cost of negative interest rates without
• 15:57
  Speaker 1: having places to put the money. Well, if it's such
• 16:01
  Speaker 1: a threat, then how did these decisions get made in
• 16:04
  Speaker 1: the first place. These are serious people, many have spent
• 16:07
  Speaker 1: a lifetime in economic policy making. How did this happen?
• 16:13
  Speaker 1: How did we get here? I honestly think it's because
• 16:16
  Speaker 1: central bankers think monetary policy, not financial stability. In most
• 16:22
  Speaker 1: central banks, those are on two very different tracks. We
• 16:27
  Speaker 1: learned the hard way in the crisis that if they're
• 16:29
  Speaker 1: on different tracks, you can have a head on collision.
• 16:32
  Speaker 1: But it's not in the gut of central bankers to
• 16:35
  Speaker 1: think about financial stability. They think about price stability, they
• 16:39
  Speaker 1: think about unemployment, and they're not really thinking through how
• 16:46
  Speaker 1: money moves through the economy. What do you do with
• 16:48
  Speaker 1: the payment system? Is Janet Yellen rightly said last week, Uh,
• 16:53
  Speaker 1: these are questions of Eurozone is just doing, you know,
• 16:56
  Speaker 1: playing um by the seat of its pants here? They
• 16:59
  Speaker 1: don't know. And this is despite the fact that many
• 17:02
  Speaker 1: of these central banks have taken on additional regulatory responsibilities
• 17:07
  Speaker 1: since the crisis. That's very true, Dan, but I think
• 17:12
  Speaker 1: it's new to them and it's not built into their culture.
• 17:14
  Speaker 1: And every one of these central bankers came of age
• 17:18
  Speaker 1: as a monetary policy expert and a central bank or
• 17:22
  Speaker 1: not as a bank regulator. That's the era when inflation
• 17:25
  Speaker 1: was the number one problem. That's correct. Acky, Are you
• 17:29
  Speaker 1: seeing any of the reverberations from the boj's decision to
• 17:35
  Speaker 1: explore negative interest rates. It's pretty early on and they
• 17:38
  Speaker 1: just rolled it out this week, But are you seeing
• 17:40
  Speaker 1: any impacts there yet? Sure? So? Um I guess the
• 17:45
  Speaker 1: biggest impact so far has been in the financial markets.
• 17:49
  Speaker 1: Um So, the entire GGB curb the Japanese government, by
• 17:54
  Speaker 1: the old curb that's come down. Uh, Like we talked
• 17:57
  Speaker 1: about earlier, there is now lightly negative yields on even
• 18:02
  Speaker 1: ten year Japanese government bonds, which is completely grandy to
• 18:07
  Speaker 1: borrow money for ten years and not have to pay
• 18:11
  Speaker 1: any interest. Yeah, it's it's not b R. Expecting a
• 18:15
  Speaker 1: drop in some mortgage rates, which should help for the
• 18:18
  Speaker 1: Japanese housing market. There are some signs that it was
• 18:21
  Speaker 1: flowing bound before the b OJ decisions. You know. The
• 18:25
  Speaker 1: interesting thing here is the foreign exchange market, because right
• 18:29
  Speaker 1: after the Leaguersjapan decision, the end weakened by a lot,
• 18:34
  Speaker 1: But then just a couple of days later, with all
• 18:36
  Speaker 1: this volatility and global markets, its strengthened way past where
• 18:41
  Speaker 1: it was before the b OJ decision, which gives you
• 18:44
  Speaker 1: kind of a sense of how powerless a central bank
• 18:48
  Speaker 1: can be in the space of such large market forces.
• 18:51
  Speaker 1: And you know, there's this really interesting local opinion poll
• 18:56
  Speaker 1: just a couple of days ago, conducted by one of
• 18:58
  Speaker 1: the local newspapers, and people were asked, will negative interest
• 19:02
  Speaker 1: rates for the Japanese economy? These are Japanese people who
• 19:05
  Speaker 1: are being asked, and I don't know, maybe Japanese consumers
• 19:08
  Speaker 1: are especially pessimistic, but the vast majority of them said no,
• 19:12
  Speaker 1: and only thirteen people said yes that it would be effective.
• 19:18
  Speaker 1: Really Palace, I mean, you've talked at about the negative
• 19:21
  Speaker 1: impact on Japanese bank stocks, for example. Is that aptance
• 19:26
  Speaker 1: or is it diminishing return? It's a great question. I'm
• 19:30
  Speaker 1: not sure. Like Karen was talking about earlier, banks have
• 19:34
  Speaker 1: already been in this environment of extremely low interest rates
• 19:39
  Speaker 1: for a very long time. So by you know, sending
• 19:43
  Speaker 1: that into negative territory, even just slightly, it's it's it's
• 19:47
  Speaker 1: unclear if that would do a whole lot. But like again,
• 19:50
  Speaker 1: this is you know, an extraordinary experiment. Um It's it's
• 19:54
  Speaker 1: exciting for us monetary policy journalists, because we haven't seen
• 19:59
  Speaker 1: a whole lot of examples in the past, and doing
• 20:02
  Speaker 1: this quick calculation, and with the b o J joining
• 20:05
  Speaker 1: the links of the prestigious Nerve Club UM, one quarter
• 20:11
  Speaker 1: of the global economy is now run by central banks
• 20:14
  Speaker 1: that have deployed interest rates. So it's really not the
• 20:18
  Speaker 1: fringe thing anymore the way it was in Denmark first
• 20:21
  Speaker 1: announced a couple of years ago. I think my question is, Karen,
• 20:27
  Speaker 1: do you think more banks are gonna follow? You talked
• 20:30
  Speaker 1: about the you know, extraordinary risks that come with this policy,
• 20:33
  Speaker 1: but it feels like it's becoming more mainstream. In terms
• 20:38
  Speaker 1: of the central banks. I think there are two things
• 20:42
  Speaker 1: that can happen. One is the central bank, like the FED,
• 20:45
  Speaker 1: picks negative interest rates, and the second is that they're
• 20:48
  Speaker 1: imposed on it by market forces and the policy issues.
• 20:52
  Speaker 1: I think in the United States, either one of those
• 20:54
  Speaker 1: courses has a very different impact, even then in Japan
• 20:58
  Speaker 1: because the dollar is the and Schmark currency and treasury
• 21:02
  Speaker 1: securities are the safe haven asset in the world. And
• 21:06
  Speaker 1: yet is it really such a disaster though, I mean,
• 21:09
  Speaker 1: you can walk down a street in Copenhagen, as I
• 21:12
  Speaker 1: did about nine months ago and not have any sense
• 21:15
  Speaker 1: of impending disaster and a key as you know better
• 21:19
  Speaker 1: than anyone, life goes on in Japan. Yeah, that was
• 21:22
  Speaker 1: my question too. Have we actually seen anything that catastrophic
• 21:26
  Speaker 1: happen from this very unchartered territory that where in has
• 21:29
  Speaker 1: anything gone wrong yet? At least not in Japan? But
• 21:33
  Speaker 1: you know, the policy went into effect on two days weeks,
• 21:38
  Speaker 1: so there's plenty of opportunity for bad things to happen.
• 21:42
  Speaker 1: I think, Karen, isn't the concern more kind of what
• 21:45
  Speaker 1: happens to the banking system in the long term when
• 21:48
  Speaker 1: you keep bit of interest rates around for such a
• 21:51
  Speaker 1: long time. That's one of the concerns. It's true, I
• 21:55
  Speaker 1: think I said before and then just bears repeating, we've
• 21:58
  Speaker 1: never done this before war. And how low you go
• 22:01
  Speaker 1: for how long you go in what type of an
• 22:04
  Speaker 1: economy I think is going to determine whether or not
• 22:09
  Speaker 1: it has good effects those desired by the central banks,
• 22:14
  Speaker 1: moderate effects, or really really dangerous ones. And how low
• 22:18
  Speaker 1: are we talking here when when we talk about negative
• 22:20
  Speaker 1: interest rates? What what do those look like in these
• 22:24
  Speaker 1: various countries. Most of the countries they're relatively modest and
• 22:28
  Speaker 1: minus twenty five or even fifty basis points. Sweeten justment
• 22:32
  Speaker 1: went much lower chalking the markets. UH. Switzerland has done this,
• 22:37
  Speaker 1: and some of the countries like Switzerland and Denmark are
• 22:40
  Speaker 1: also using negative rates, not so much for macroeconomic purposes,
• 22:44
  Speaker 1: but for exchange rates stabilization, and some of the analysis
• 22:48
  Speaker 1: we've been talking about applies a lot less to them
• 22:51
  Speaker 1: because they're doing it for a very different reason than
• 22:53
  Speaker 1: the Bank of Japan or the e c B. And
• 22:55
  Speaker 1: how low can we go here? I saw study the
• 22:59
  Speaker 1: other day that suggested that the United States could take
• 23:03
  Speaker 1: rates as low as a minus four point five. But
• 23:06
  Speaker 1: that's good, I couldn't finish it well. I think this
• 23:12
  Speaker 1: is a great opportunity to bring it back to the US.
• 23:14
  Speaker 1: And there is a lot of debate here right now
• 23:17
  Speaker 1: about whether or nerve is something that the FED should entertain,
• 23:20
  Speaker 1: even though it just initiated a tightening cycle here with
• 23:23
  Speaker 1: interest rates. Stocks have been tanking this year, and there's
• 23:26
  Speaker 1: a ton of speculation about recession risk, and people want
• 23:29
  Speaker 1: to know what the FED can do in case all
• 23:31
  Speaker 1: hell breaks loose in the U s economy. Essentially, and
• 23:34
  Speaker 1: let's be clear that FED still has room to maneuver
• 23:38
  Speaker 1: before it too has to seriously consider negative indust rates.
• 23:42
  Speaker 1: It could, you know, maybe do another round of quantitative easing.
• 23:46
  Speaker 1: It could cut its benchmark interest rate to where it
• 23:49
  Speaker 1: was before the December hike. But you know, Karen, if
• 23:52
  Speaker 1: if it comes to it, if things get really bad,
• 23:54
  Speaker 1: do you think that FED will seriously consider negative interest
• 23:58
  Speaker 1: rates too? And do you think they can even legally
• 24:01
  Speaker 1: do it, which was a question that came up last week.
• 24:04
  Speaker 1: We know they have seriously considered it because of the
• 24:09
  Speaker 1: paperwork that was released a couple of weeks ago showing
• 24:12
  Speaker 1: an extensive amount of analysis as well as legal thinking
• 24:15
  Speaker 1: about negative interest rate policy. We know there are folks
• 24:20
  Speaker 1: at the FED or around the FED, such as former
• 24:23
  Speaker 1: Chairman Bernankey, urging the FED to take this seriously. And
• 24:27
  Speaker 1: we know Chairman chair Yellen said last week that it's
• 24:30
  Speaker 1: a tool. Now. I think, Dan, you're absolutely right. Bill
• 24:35
  Speaker 1: Dudley doesn't want to pick it up. And I know
• 24:38
  Speaker 1: everyone I talked about the FED is very, very aware
• 24:42
  Speaker 1: of what a dramatic shock it would be to the
• 24:46
  Speaker 1: market if the FED were to go nurpe. But just
• 24:50
  Speaker 1: to sort of take a step back, Karen and help
• 24:53
  Speaker 1: us with an overall global document here. Many of the
• 24:58
  Speaker 1: central banks we've discussed either are inflation targeters or have
• 25:03
  Speaker 1: a version of inflation targeting, and typically that target is
• 25:07
  Speaker 1: give or take around two Now they're not close to that,
• 25:11
  Speaker 1: They're not remotely close to it. In some instances, it's
• 25:14
  Speaker 1: going the other way. I should they just do nothing?
• 25:17
  Speaker 1: Is that really a credible response to the ear of
• 25:21
  Speaker 1: disinflation slash deflation? Oh? I think nothing would be awful.
• 25:26
  Speaker 1: But um, they've got a choice of additional tools. Tories mentioned.
• 25:33
  Speaker 1: Some of them might certainly add into accommodate. A policy
• 25:37
  Speaker 1: in the United States would be politically controversial. Negative rates
• 25:42
  Speaker 1: would be too. There are changes that could be made
• 25:46
  Speaker 1: to the regulations, for example, and I know this is
• 25:49
  Speaker 1: politically controversial, but one of the reasons banks are sitting
• 25:53
  Speaker 1: on so many reserves right now is the new liquidity rules.
• 25:57
  Speaker 1: There are things the FED or the other are banking
• 26:01
  Speaker 1: central banks could do to freeze some of this money
• 26:04
  Speaker 1: up and try to get that financial intermediation flow working.
• 26:08
  Speaker 1: I think the fundamental problem the central banks are throwing
• 26:12
  Speaker 1: everything they've got trying to get inflation up and growth moving,
• 26:19
  Speaker 1: and the financial system is just not responding. And we
• 26:24
  Speaker 1: need to understand why that is, and I think fixed
• 26:27
  Speaker 1: for that. I mean, is there anything particular and special
• 26:32
  Speaker 1: to the US financial system that makes negative rates especially
• 26:37
  Speaker 1: dangerous or conversely particularly effective compared to elsewhere? Alright, think,
• 26:44
  Speaker 1: in the United States we have probably the biggest choice
• 26:48
  Speaker 1: of alternatives to negative rates in terms of deposits fleeing
• 26:52
  Speaker 1: the banking system. And you really could see a very
• 26:55
  Speaker 1: ironic condition in which liquidity rules that are forcing banks
• 26:59
  Speaker 1: to keep lots of and excess reserves create a liquidity
• 27:03
  Speaker 1: crisis as core deposits go flying out the door in
• 27:07
  Speaker 1: hopes of a positive returns. On that cheery note, well
• 27:13
  Speaker 1: this is uh. This has been a great primer on
• 27:16
  Speaker 1: negative interest rates. Karen, thank you so much for joining us,
• 27:20
  Speaker 1: and I guess we'll stay tuned to see what the
• 27:22
  Speaker 1: US ends up having to do over the next few
• 27:25
  Speaker 1: months and maybe even years. Thank you very much for
• 27:28
  Speaker 1: inviting me to join you, and thanks so as you
• 27:31
  Speaker 1: for listening to Bloomberg Benchmark. Will be back again next week.
• 27:35
  Speaker 1: Until then, you can find us on the Bloomberg terminal
• 27:37
  Speaker 1: and on Bloomberg dot com, as well as on iTunes,
• 27:40
  Speaker 1: Pocket cat Picture, and Google Play. While you're there, Please
• 27:44
  Speaker 1: take a minute to rate and review the show so
• 27:46
  Speaker 1: more people can find us and let us know what
• 27:49
  Speaker 1: you thought. Our guest Karen is on Twitter at Karen
• 27:53
  Speaker 1: Petrew and you can reach the rest of us at
• 27:55
  Speaker 1: Daniel Moss d C, at Akso seven and at tour.
• 28:00
  Speaker 1: We still will see you next wing. This episode was
• 28:14
  Speaker 1: brought to you by nate X. You know any long
• 28:16
  Speaker 1: term investment is going to go through short term dips
• 28:19
  Speaker 1: and price fluctuations. Nate X binary options that you turn
• 28:22
  Speaker 1: those short term movements into trading opportunities. You decide your
• 28:26
  Speaker 1: maximum profit and loss before each trade, so your risk
• 28:29
  Speaker 1: is always limited. Trade stock indussees commodities for X, even
• 28:32
  Speaker 1: Bitcoin in economic numbers, all from one account on a
• 28:36
  Speaker 1: CFTC regulated US exchange. Instead of just watching the markets
• 28:40
  Speaker 1: ups and downs, turn them into trading opportunities. At nate
• 28:43
  Speaker 1: x dot com it's the future of trading and a
• 28:46
  Speaker 1: d e X dot com futures options and swaps. Trading
• 28:50
  Speaker 1: involves risk and may not be appropriate for all investors.
• 28:54
  Speaker 1: We at Bloomberg are proud of our new and growing
• 28:56
  Speaker 1: slate of original content podcasts. They include Benchmark, a jargon
• 29:01
  Speaker 1: free dive into the stories that drive the global economy.
• 29:03
  Speaker 1: It's hosted by Tory Stillwell, Aki Ito and Dan Moss.
• 29:07
  Speaker 1: Odd Lots, hosted by Joe Wisenhal and Tracy Alloway, takes
• 29:11
  Speaker 1: you on a not so random walk through hot topics
• 29:13
  Speaker 1: and markets, finance and economics, and each week Bloomberg m
• 29:17
  Speaker 1: and a reporter Alex Sherman discusses market moving news about
• 29:21
  Speaker 1: mergers in Deal of the Week from Washington and Points
• 29:25
  Speaker 1: in Between. Meantime, we showcase the intersection of politics and
• 29:28
  Speaker 1: pop culture with Culture Caucus, hosted by John Hilman and
• 29:32
  Speaker 1: Will Leach from Bloomberg Politics. And then there's Masters in
• 29:35
  Speaker 1: Politics hosted by veteran TV producers Tammy Haddad and Betsy
• 29:39
  Speaker 1: Fisher Martin. This bi weekly podcast features extended conversations with candidates,
• 29:44
  Speaker 1: campaign strategists, and journalists. You can find all these podcasts
• 29:47
  Speaker 1: on the Bloomber terminal, bloomber dot com, iTunes, SoundCloud, and
• 29:52
  Speaker 1: any one of your very favorite podcast platforms.