25 January 2013

Alan Blinder: The Fed Should Pay the Banks Negative Interest Rates on Reserves

As I said to the reader who forwarded this, 'you have no idea how much this admission by Blinder means to me.'

This is not the first time he said this, he is now repeating it again more publicly and for the record. That means he sees what is happening and is worried about it. And it is something that is probably not being discussed in Davos, except behind closed doors, and especially not with the financial media's Wall Street spokesmodels.

This is a particular moment to be savored, because at the time that the Fed started paying interest on bank reserves it held, there was quite a bit of hoopla and browbeating by 'professional economists' and some NY Fed people, and their media mouthpieces, about my own interpretation of what it meant, and how those reserves would function, and what they would and would not do. And as I recall a few brave politicians were also rasing the same concerns, only to be beaten down by 'experts.'

The Fed has been pussyfooting around the credibility trap of their own policy failures for quite some time.  This is hard for an academic to do, because so much of their personal currency is based on 'reputation' and the back-scratchers club.

So now the hacks can argue with Alan Blinder, former Vice Chair of the Fed. They may disagree with his policy judgements, but they might find it harder to dismiss his argument with the usual 'he doesn't understand the banking system' approach which they tend to use when they wish to silence dissent.  I took quite a bit of flack for this on the economic blogs comment sections and was fairly disgusted by what looked like a disinformation campaign.

I am no great fan of Blinder, and his own rationalisation of the Fed's actions and the bailout are disturbing. But I will use what I can get and he explodes at least one of the monetary myths that a number of people had questioned, only to be shoved aside.  The actions of the Fed have been all about bailing out the Banks, and in their fear and greed the politicians have gone along with them, both in the US and in Europe.

Paying no interest, or even negative rates on reserves, makes some sense, in motivating the banks to not to sit on their cash and gamble with it in the markets, and prop up mismarked assets, but to find some productive uses for it.

My only concern is that in this currently corrupt system the failure to pay interest or to even charge a fee for it would drive even more 'hot money' into financial asset bubbles in the US and overseas rather than productive loans and real investments in support of growth and recovery and real wages.  This is one of the great drawbacks of the repeal of Glass-Steagall. 

On the bright side, negative interest rates, including negative real rates, are a stimulus for gold which is money in its own right and on its own standing, as my friend Hugo Salinas-Price is often wont to remind us.  And this admission by Blinder gives me the ability to feel even more confident in the rest of my forecasts, provided the government does not do something stupidly draconian out of panic.  Gold is going to go significantly higher in price.  The big players are already positioning for it.

And if these negative rates were applied to what is paid to individual savers and depositors, then that would be even more of a travesty that what is occurring today as prudence and honesty are penalized by policy originating from the monied interests and their public servants. This is a real concern given the lack of serious reform of the system.

It would be like strafing the lifeboats, which is something some financial engineers would do if given the opportunity and the motivation in support of their increasingly convoluted and self-serving policy errors.  

Making the Case for Negative Interest Rates
By Allan Dodds Frank
25 January 2013

Former Fed official Alan Blinder talks about how to fix the economy, where the next crisis will come from, and how scared investors should be.

FORTUNE -- The nation's biggest banks have been nursed by the Federal Reserve way too long, former Federal Reserve Vice Chairman Alan S. Blinder said Thursday as he kicked off the tour for his new book, After The Music Stopped: The Financial Crisis, The Response and the Work Ahead.

The Federal Reserve, says Blinder, should stop paying interest to banks for their overnight deposits and should move to charge them for parking money. He says if the Fed set negative interest rates for overnight deposits – in effect charging a fee – banks would have to figure out better ways to make money and one obvious alternative would be to lend more to customers.

The book, the 20th by the liberal Democrat economist who is the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton University, defends the U.S. government bailout prompted by the financial crash in the fall of 2008 as a job well done, while critiquing it as a misunderstood rescue that could have been done more cleanly. Blinder tries to adopt the perspective of middle class Americans who remain angry that the big banks stayed afloat with public money while doing little to help their retail customers during the bail-out...

Sparing no sitting ducks, Blinder blasts former President George W. Bush, former Treasury Secretary (and Goldman Sachs (GS) co-CEO) Henry "Hank" Paulson and their successors – President Barack Obama and Treasury Secretary Timothy Geithner - as communications failures whose collective silence about what was really going on amounted to public disservice. (And where wasMr. Blinder when all this was happening, from Greenspan to Bernanke? - Jesse)

While citizens fail to understand the positive role the Federal Reserve played [sic - literally], Blinder also says people have a right to be angry about the ongoing practice that encourages banks to keep their deposits out of general circulation(The Fed's failure as bank and market regulator is epic - Jesse)

"I have been advocating – and have not yet quite convinced (Federal Reserve Chairman) Ben Bernanke, although I am still working on it - that the Fed should lower, first to zero and then probably to negative, the interest rate it pays banks for holding reserves at the Fed," Blinder said Thursday. "When I want to be polemical about it, I say things like: 'My bank pays me one basis point on my checking account. Why are you paying my bank 25 basis points on their checking account?...'"