For Negative Interest Rates — Bank of Canada Likely To Follow Suit
— What Choice Do We Have?
New York, 10 October. Alan Greenspan said today that interest rates are heading into negative territory. The US Federal Reserve Chairman is determined to end the recession and get the economy perking again. "On 15 November I'll set rates at —5% (that's 5 percentage points below zero) and I'll go even lower if necessary," he told Notional Pest's business editor on Monday.
In logic, negative rates make good sense. If lowering interest rates are good for stimulating the economy, why stop at zero? There is nothing in economic theory that prohibits negative rates of interest charged on bank loans.
Here's how negative interest rates will work in practice. A company or an individual goes into his bank for a loan. Let's say he borrows $10,000 for a year. At —10% interest, at the end of the year he only has to pay back $9,000 to the bank. Meanwhile, he's had the full $10,000 to spend as he sees fit. Putting the $10,000 in the bank would only earn him the same negative interest, so he must spend it, which is just what the economy needs. With millions of people doing the same, the economy would get an enormous boost. In fact, any person not taking out such a loan, for whatever amount or for whatever reason, would be a damn fool.
Mr. Greenspan admitted that people who live on interest from investments—retirees and others—would continue to find themselves in a difficult situation. They would have to put money into their investment accounts on a regular basis; otherwise their capital would steadily deteriorate. But even these people would find the negative rates to their advantage. For instance a retiree could simply borrow the amount of money he needs to live on and a year later, pay it back (less 10%) with money taken out of his steadily decreasing retirement portfolio. "This is not good," Mr. Greenspan said, "but when interest rates are low, people living on their interest always find themselves in difficulty.
We asked Mr. Greenspan how any bank could survive by lending money at negative interest rates? "Easy," he said. "They'll borrow the money from Federal Reserve at a rate even lower than they're charging their customers, so they'll still make money." But, Isn't that just the same as the government printing money? we asked. "No," he said. If people didn't spend the money they get from their bank that would be the case. But, with negative interest rates people have to spend—no other strategy makes sense for them. With all this money floating around, we'll have a tremendous boost in spending and, of course, productivity, which is the key to a healthy economy. Indeed, with the economy surging to such an extent, I'll likely have to clamp down by raising interest rates into positive territory again. Then, with the economy booming again, everybody, including the retirees, will be happy."