The Financial Times Endorses Negative Interest Rates
Link to “The wrong lesson to take from negative yields”
The Endorsement
On June 10, 2016, just four days after a remarkable Brookings conference on negative interest rates, the Financial Times gave a ringing endorsement of a vigorous use of negative interest rates. The subtitle, “Central banks should be pushing ahead with monetary stimulus,” aptly describes the tenor of the editorial. The strength of this editorial is in directly answering complaints by bankers about negative rates:
Predictably, banks and investors have renewed their complaints that a negative-rate environment is causing havoc with the financial system and risks a cataclysmic cascade of losses if prices fall and yields go up sharply. Some have explicitly blamed central banks such as the Bank of Japan and European Central Bank which have cut short-term interest rates below zero.
These criticisms are wrong-headed. Long-term yields are not heading below zero because central banks are arbitrarily planning to keep short-term interest rates down for years on end. They are reflecting expectations of anaemic nominal economic growth, with both real expansion and inflation strikingly low, for decades ahead.
The answer is not for central banks to abandon the negative-rate experiment but to continue to find every means possible to deliver the stimulus that will increase growth and, with it, inflation and yields.
Further on in the editorial, the Financial Times drives home the message that the need for negative rates is sad, but the negative rates themselves are part of the solution:
Negative short-term rates are not the problem. They are evidence of central banks’ determination to try to address the problem, which is the weak growth and inflation that is driving longer-term yields to zero and below. Investors and policymakers who fail to see this are making a serious mistake.
Bond yields at or below zero are a bad sign. Savers and banks suffering from them should recognise that throwing as much stimulus at the economy as possible is the answer, not raising short-term interest rates to the levels of earlier decades and imagining that the normality of the past will then return.
Right before that, the Financial Times even answers a potential objection that low rates could hurt financial stability:
If they are worried about the distortion in the financial system caused by low or negative rates, they should turn to their macroprudential tools, such as direct controls, to prevent excessive lending against housing, rather than holding rates higher than is warranted by the growth of nominal demand.
Discussion
Overall, this is a very strong endorsement of negative interest rate policy by the Financial Times editorial board, that bears comparison to, say, Narayana Kocherlakota’s strong endorsement of negative interest rates policy in these Bloomberg View columns:
One reason I think this comparison is apt is that, like the Financial Times editorial board, Narayana still wishes for fiscal policy help along with negative rates, while I argue that going further with negative rates is preferable to relying partially on fiscal policy. You can see my discussion of that here:
I also tend to think that the conventional monetary policy of negative rates should be used instead of relying partially on the term-premium compression of QE.
Once short-run output gaps are close by interest rate policy, then it will be clearer what the appropriate fiscal policy is from a long-run perspective, which I discuss in
- Discounting Government Projects
- One of the Biggest Threats to America’s Future Has the Easiest Fix
- Capital Budgeting: The Powerpoint File
- What to Do When the World Desperately Wants to Lend Us Money,
as well as what kind of financial market interventions along the lines of QE might be appropriate for medium-run or long-run reasons. On that last, see the links in my my post
Peter Conti-Brown: Central Bankers Are Humans
“… we really do want a central bank that will protect the currency from the winds of electoral politics, without losing the benefits of democratic legitimacy and without indulging the myth that all central bank policy is purely technocratic. We can and should be comfortable with the reality that central bankers, like everyone else, are people whose life experiences—including their technical training—give them an ideological frame of reference through which they evaluate the world. The key to reforming the Fed is to know as much about the values of those central bankers as possible.”
Peter Conti-Brown, The Power and Independence of the Federal Reserve.
Note that with the neutral usage Peter makes of the word “ideological,” the meaning is the same as if it said “give them a frame of reference through which they evaluate the world.''
Narayana Kocherlakota: Negative Interest Rates Are Nothing to Fear
I had a good chance to talk to Narayana Kocherlakota in person at the Brookings conference on negative interest rates on June 6, 2016, and you can see him on the video nodding when I said that we should be telling people that deep negative interest rates are possible if needed. And sure enough, on June 9, Narayana wrote about the possibility of eliminating the zero lower bound in his Bloomberg View column “Negative Rates Are Nothing to Fear.” Here is the relevant passage:
Negative interest rates could eventually become an even more powerful tool. Some economists – such as University of Michigan economist Miles Kimball, who presented at the Brookings conference – point out that central banks are capable of taking rates as far below zero as they deem necessary. To increase the cost of holding currency, for example, they could charge banks a fee to change it into electronic central bank money.
Economically useful as such an option would be, central bankers must recognize that the prospect of being charged, say, 6 percent a year just to hold cash could unsettle people. For such a policy to work as intended, officials would have to do a lot of explaining ahead of time – communication that could have the added benefit of ensuring that the public understands the central bank’s goals and supports its methods of achieving them.
The Brookings conference on negative interest rates was a milestone in many other ways as well. Let me go so far as to say that no journalist writing about negative interest rates is well informed unless they have watched that Brookings conference.
“Negative Interest Rate Policy as Conventional Monetary Policy” in German: “Negativzinspolitik als konventionelle Geldpolitik”
Link: “Negativzinspolitik als konventionelle Geldpolitik” (pdf)
Link to the English version: “Negative Interest Rate Policy as Conventional Monetary Policy”
Journal placement is not the only measure of the importance of an academic paper. I have had many papers published in the American Economic Review or Econometrica, but I have only had one academic paper translated into another language: “Negative Interest Rate Policy as Conventional Monetary Policy,” which is published in the National Institute Economic Review. I appreciate Werner Onken (editor) and Beate Bockting (translator) of the Zeitschrift fuer Sozialoekonomie (Journal for Social Economics) for making the translation happen, Angus Armstrong for arranging for permission from the National Institute Economic Review, and Tilman Borgers and especially Rudi Bachmann for checking the German translation with an eye to the cadence and the economic substance.
Let me also highlight the INWO, the Initiative fuer Naturliche Wirtschafts Ordnung (Initiative for Natural Economic Order). Here is INWO’s webpage on monetary reform, which among other things reports on several important negative interest rate conferences.
Leon Berkelman’s Report on the Brookings Conference on Negative Interest Rate Policy
The Brookings (Hutchins Center) conference last Monday was another milestone for negative interest rate policy. I thought every minute of the conference was illuminating. This one is really worth watching. Here is Leon Berkelman’s reaction to watching the video, which he was kind enough to write up as a guest post:
A few weeks ago I gave a talk to some economics undergraduate students at the University of New South Wales. I told them I was ridiculously envious of them. When I was an undergraduate in Australia, it was impossible to know what the giants of the profession were discussing. Without physically attending a conference in the US, you could only rely upon word of mouth, or until someone wrote a book, to ponder their thoughts. Now, it’s different. To channel the Australian Prime Minister, there has never been a more exciting time to be a student of economics.
But I can’t complain too much. I get to reap the benefits now. And so it was with a gold-plated conference that the Brookings Institution ran on the 6th of June on negative interest rates. Soon after the conference finished, several hours of video were posted featuring the musings of rock stars like Bernanke, Kohn, and Slok.
Of most interest to me was Miles Kimball’s presentation. Miles has been discussing methods for overcoming the difficulties in implementing deep negative rates for a while now. Basically, if monetary authorities try to implement rates too far below zero, which they may want to do if the economy is depressed, we think that people and institutions will move away from assets earning negative rates, like deposits, into cash, which earns a zero return. We’ve heard rumblings about this recently in Germany and Japan. Such a move will cause many problems. For example, banks may see their deposit base disappear, but that’s far from the only problem.
The root of the issue is that physical cash maintains its nominal value. That places a limit on how low rates can go. But what if physical cash did not maintain its value? For example, what if you could somehow tax it? Well, then physical cash would be costly to hold, and the incentive to pile into it is gone. Problem solved.
Miles and others have suggested that you could devalue physical currency by having it depreciate. At the moment, a physical dollar is worth one dollar in the bank. However, you could break that one-to-one link, and you could have, say, one dollar in physical cash worth 90 cents in the bank. In the circumstances of a time-varying exchange rate between the two monies, if physical money was expected to depreciate, then once again the allure of physical cash is gone. It is again costly to hold physical cash. Again, problem solved. For the interested reader Miles’s website is a wonderful resource discussing how this idea would work, and some of the challenges it faces.
I’ve written and spoken about this idea before. I like it. However, as mentioned many times in the Brookings conference, the idea is politically toxic. My response is that it is then up to economists to advocate and educate. If economists think that such an idea can be useful, then shrugging our shoulders and saying that politics renders the idea a non-starter is not good enough. Economists consistently butt their heads up against a brick wall when arguing for cuts in fossil fuel subsidies, which are popular, but are economically and environmentally absurd. With strong enough advocacy, economists have chipped away and have had victories in the fossil fuel realm. Why not the Kimball solution too?
There are precedents of previously unthinkable monetary regime shifts. Going off the gold standard is one. Don Kohn, in his discussion during the conference, noted that these shifts involved changes in the relationship between money and goods (for example gold), rather than the relationship between monies. But we have seen different monies trade at different values before. For example, in the United States, before the Civil War, banks issued their own distinct private banknotes that traded at different rates. People did not riot in the streets then. Are we less able to cope with a small degree of complexity than we were in the 1850’s? I don’t think so.
Miles made the comment during the conference that monetary historians can be very useful right now in helping us to think through debates about our monetary system. They know the way things have worked before, and so they know what was politically feasible before. I suspect political feasibility is a more elastic concept than many appreciate.
Poverty of the Heart
Link to Wikipedia article on the June 12, 2016 Orlando nightclub shooting
After the Boston Marathon bombings, I posted this wish:
May the best in the human spirit vanquish the worst in the human spirit.
That wish needs to be renewed in the wake of the killing by assault rifle and handgun of at least 51 people in Orlando.
There is a tradition that looks for poverty as the cause of crimes such as this. I think it is indeed poverty that causes such crimes, but not primarily poverty of the wallet, but poverty of the heart. When people don’t find other, better meanings for their lives, they sometimes glom onto a meaning suggested by a murderous organization with a vivid ideology.
May we work hard to help people find better meanings in their lives so that fewer of them will be attracted to the idea of a caliphate founded on the blood of unbelievers.
John Stuart Mill on Sins of Omission
The world is hurting. A big reason that the world is in as much trouble as it is this: how many people have done less than they should to make things better. We rightly honor those who have helped make the world a better place. It is also right to criticize those who, though able to do so, have failed to help make the world a better place. And each of us should examine themselves closely to see if we should be doing more.
As a practical matter, the law must tilt toward attacking sins of commission–things that people do that stand out from everyday actions and are bad. This can lead people to miss the moral gravity of doing nothing when doing something is called for. John Stuart Mill points out the importance of individual conscience in judging when we have done too little. In the 11th paragraph of the “Introductory” to On Liberty, he writes:
It is proper to state that I forego any advantage which could be derived to my argument from the idea of abstract right, as a thing independent of utility. I regard utility as the ultimate appeal on all ethical questions; but it must be utility in the largest sense, grounded on the permanent interests of man as a progressive being. Those interests, I contend, authorize the subjection of individual spontaneity to external control, only in respect to those actions of each, which concern the interest of other people. If any one does an act hurtful to others, there is a primâ facie case for punishing him, by law, or, where legal penalties are not safely applicable, by general disapprobation. There are also many positive acts for the benefit of others, which he may rightfully be compelled to perform; such as, to give evidence in a court of justice; to bear his fair share in the common defence, or in any other joint work necessary to the interest of the society of which he enjoys the protection; and to perform certain acts of individual beneficence, such as saving a fellow-creature’s life, or interposing to protect the defenceless against ill-usage, things which whenever it is obviously a man’s duty to do, he may rightfully be made responsible to society for not doing. A person may cause evil to others not only by his actions but by his inaction, and in either case he is justly accountable to them for the injury. The latter case, it is true, requires a much more cautious exercise of compulsion than the former. To make any one answerable for doing evil to others, is the rule; to make him answerable for not preventing evil, is, comparatively speaking, the exception. Yet there are many cases clear enough and grave enough to justify that exception. In all things which regard the external relations of the individual, he is de jure amenable to those whose interests are concerned, and if need be, to society as their protector. There are often good reasons for not holding him to the responsibility; but these reasons must arise from the special expediencies of the case: either because it is a kind of case in which he is on the whole likely to act better, when left to his own discretion, than when controlled in any way in which society have it in their power to control him; or because the attempt to exercise control would produce other evils, greater than those which it would prevent. When such reasons as these preclude the enforcement of responsibility, the conscience of the agent himself should step into the vacant judgment seat, and protect those interests of others which have no external protection; judging himself all the more rigidly, because the case does not admit of his being made accountable to the judgment of his fellow-creatures.
Although the distinction between action and inaction is intuitive to many people, from a Utilitarian perspective, the difference is not morally meaningful. As I wrote in another context, “Anything one does has consequences. There is no true ‘inaction.’ There is only “Do A” or “Do B.” As John Stuart Mill points out, the difference between what we call “inaction” as opposed to what we call “action” is relevant to the balance between law, social opprobrium and individual conscience as checks against a socially bad choice. But the fact that something is called “inaction” does not make it any more innocent when one is examining oneself.
One could argue that if one rejects the distinction between so-called “action” and “inaction” as morally meaningful, then when we think that something is genuinely permitted as “inaction,” it may be that it should be permitted as “action.” For example, think of the fact that it is generally accepted in our culture as OK for someone to say that even moderate medical measures–for example, taking a round of antibiotics–should not be taken to keep them alive since they feel that they are ready to die (say because someone else they cared about deeply has already died, rather than because of some other more intractable physical problem). For those who genuinely think that it is OK to reject such moderate medical measures because they want to die, it seems it is not a big step to say that they should then logically view it as OK for who someone in the same situation–except for not needing the antibiotics–to press a button for an overdose of morphine for themselves that would lead them to die.
But that line of thinking is suspect for a simple reason. Our intuitions are better and more reliable for judging the morality of what we tend to call an “action” are better than our intuitions for judging the morality of what we tend to call an “inaction.” Therefore, I argue that the standards we tend to use for “actions” should be applied to “inactions” rather than applying the standards we tend to use for “inactions” to “actions.” Thus, rather than providing an argument for euthanasia (which might be justifiable on other grounds),I view the moral equivalence of “actions” and “inactions” with the same kind of effect as suggesting that people have a duty to try to stay alive if moderate medical measures would suffice to keep them alive and in reasonable health that does not include severe physical or intolerable mental pain (where “intolerable” mental pain means something beyond the normal, but intense, grief one typically feels when someone close has died first).
But despite the interest many of us have in the ethics of euthanasia and the ethics of instructions to limit medical efforts to save one’s life, I think there is a more important application of the principle that our more reliable judgements of the ethics of what we call “actions” should be used to illuminate our duties in relation to what we call “inactions.” The moral equivalence of “actions” and “inactions” (that have the same effect) points to the duty each one of us has to do what we are individually capable of doing toward trying to save the world.
Peter Conti-Brown on the Complexity of the Idea of “Independence” of a Central Bank,
“… Fed insiders and interested outsiders form relationships using law and other tools to implement a wide variety of specific policies. To understand more, we need to specify the insider, the outsider, the mechanism of influence, and the policy goal.”
On Gradualism in Negative Interest Rate Policy
Noah Smith does a service by reviewing the debate on negative interest rate policy in his Bloomberg View column “Maybe We Shouldn’t Be So Positive About Negative Rates.” Despite the title, which I suspect (based on my own experience as a Quartz columnist) was chosen by Noah’s editor rather than by Noah himself, Noah sums it up in this rather positive way:
So while Miles is an important and visionary thinker on monetary policy, and his ideas will be very useful if another crisis comes, I’m personally a bit wary about deploying them in relatively normal times.
This is not an uncommon view. Indeed, you can see it evidenced by several luminaries at the Brookings conference on negative interest rates on Monday in reaction to my talk and the panel discussion afterwards.
Let me discuss Noah’s perspective in the context of the US, Japan, and the Eurozone, then conclude by talking more generally about the set of nations and regions that conduct independent monetary policy.
Negative Rate Policy in the United States: To get the record straight, I do not currently advocate even mildly negative interest rates for the United States. So to the extent that “relatively normal times” refers to the current economic situation in the United States, I have no disagreement. I have said that deep negative rates would have been appropriate for the United States in 2009. But I hope no one classes 2009 as “relatively normal times.” Whatever the uncertainties about what side effects such a policy might have had, shouldn’t we wish now that we had tried the experiment of a deep negative interest rate policy (along the lines I have recommended) in 2009? The reason we didn’t was the intellectual framework had not been laid out for such a move at that time. My hope is that by the time the next severe recession hits the United States, that we can be ready.
I think it is very important to fight the idea that the United States had an acceptable monetary policy performance during the Great Recession. As I have said many times, Ben Bernanke is a hero for doing what he did toward making US monetary policy as good as it was during the Great Recession. I don’t underestimate the difficulty of developing and getting consensus for new monetary policy tools in real time during a crisis. But in absolute terms, US monetary policy during the Great Recession is totally unacceptable as something to repeat. To speak ethically, anyone who encourages complacency about our monetary policy toolkit by suggesting that we should simple handle the next serious recession with the monetary policy tools the US used during the Great Recession alone will have to bear a portion of the guilt for the likely poor outcome if this course is, in fact, pursued.
Negative Rate Policy in Japan: After more than two decades of slow growth and deflation or near-deflation, Japan can be characterized as being in “normal times” only if one is willing to give up and accept “secular stagnation” as the new normal. Back in 2012, before I had realized the potential of negative rate policy, I remember an exchange with Noah in which we both agreed about the virtues of being willing to do big experiments. Inspired by that exchange, I wrote “Future Heroes of Humanity and Heroes of Japan” recommending that the Bank of Japan try massive asset purchases of roughly the magnitude they have in fact tried. They deserve a great deal of honor for trying that bold experiment. But it is not at all clear that it is enough. The Bank of Japan has begun gingerly experimenting with mild negative rates as well.
Japan is a difficult case for negative interest rate policy because the fraction of transactions carried out in paper currency is currently very high. So though there is real tradeoff if one delays urgently needed stimulus, gradualism in negative interest rate policy may make sense for Japan. But it is becoming clear that the Bank of Japan will probably need to go to lower negative rates than its current -.1% to get the Japanese economy to the level of economic activity it ought to have. So if it chooses not to move more quickly, the Bank of Japan should gradually reduce the key interest rates it controls, 10 basis point (.1%) at a time, while keeping a close eye on data to watch for side effects and gradually introducing either a very small negative paper currency interest rate with the depreciation mechanism that Ruchir Agarwal and I recommend in our IMF working paper “Breaking Through the Zero Lower Bound,” or gradually introduce policies from the a la carte menu of alternative policies to defang paper currency as a barrier to low interest rates that Ruchir and I laid out in our Brookings presentation on Monday. There is a lot more to say about that kind of gradualist path for Japan that I will leave to another post.
Negative Rate Policy in the Eurozone: Because the Eurozone has already experimented with deeper negative rates than Japan, and as a whole uses paper currency for a smaller fraction of transactions, it should be able to go to deeper negative rates more quickly than Japan. Still, although speed does have benefits, I have no objection to a considered judgement by those who actually bear the weight of monetary policy decision-making to go down step by step, 10 or 20 basis points (.1% or .2%) at a time. And indeed, given how much expectations matter, it would be very powerful for the European Central Bank to announce that it would continue to reduce rates by 10 basis points at each meeting–or even 5 basis points every other meeting–until either (a) it appeared there was a danger of overshooting the ECB’s inflation target of 2% or (b) other serious side effects emerged (that could not be managed by appropriate complementary policies). I think that this is, in fact, how negative interest rate policy will develop.
Conclusion: A cogent argument can be made that the world does too little macroeconomic experimentation. I believe the economies of countries that are reasonably well-run to begin with (say the OECD countries plus some others) are robust enough that they will not fly to pieces from a bit of experimentation. If they were likely to fly to pieces from a bit of experimentation, they would fly to pieces with every other unavoidable shock of any size that hit them.
Even seeing if the economy will fix itself if we do nothing, however “nothing” is defined, is worth trying. But in the realm of macroeconomic stabilization, I view “nothing” as something that–to a reasonable approximation–has been tried and has failed. Anything one does has consequences. There is no true “inaction.” There is only “Do A” or “Do B.”
It is a good thing when nations try a variety of policies among the set of policies that can be easily reversed. Louis Brandeis famously called US states “laboratories of democracy.” The many nations and regions with independent monetary policy constitute “laboratories of monetary policy.” It is a good thing, deserving of honor, for central bankers in different nations to make their own judgments about what experiments are worth trying. And it is a good thing if central bankers make some effort to carefully test novel approaches when well-worn approaches do not seem to be working well.
Enabling Deeper Negative Rates by Managing the Side Effects of a Zero Paper Currency Interest Rate: The Video
Yesterday, I participated in a Brookings Conference on negative interest rates. My talk is the first 20 minutes of the video above. My talk is followed by a panel discussion between Ben Bernanke, Narayana Kocherlakota, Beth Hammack and Jamie McAndrews, moderated by the redoubtable David Wessel, is above. And you can find the rest of the information for the conference and a video of the morning session at this link for the website pictured below.
In the morning session, I raised my hand to challenge the idea legal obstacles were likely to prevent central banks from instituting a robust negative interest rate policy. My coauthor, Ruchir Agarwal challenged Torsten Slok for claiming confidence had declined as a result of negative interest rates without having any measure of confidence other than the international capital flows that would result from an interest rate cut even in the absence of any fall in confidence. In discussions with Torsten between the morning and afternoon session, I was suggesting that minute-by-minute analysis around negative rate announcements of inflation expectations from market prices would tell if the markets had some confidence that the ECB’s moves to lower rates would raise inflation over the next few years as the ECB intends.
Ruchir and I had many other great interactions with participants. There were quite a few current and former central bankers from abroad who are as eminent for their own central banks as Ben Bernanke and Narayana Kocherlakota are for the Fed. The two of us hope to highlight some of their presentations in future posts.
Here is a Powerpoint file of my slides for this 20-minute talk.
Last Friday, I gave an 80-minute talk at the IMF, European Division. Here is the most recent version of the 80-minute “Enabling Deeper Negative Rates by Managing the Side Effects of a Zero Paper Currency Interest Rate.”
Update: Here is the 106 page “uncorrected transcript” of the conference (pdf).
Legitimate Power and Authority
In Mormonism, four books are considered to be the “word of God”: the Bible, the Book of Mormon, the Doctrine and Covenants, and the Pearl of Great Price. Collectively, these four books are called “the scriptures.”
To me, in all of Mormon scripture, one of the most beautiful–and subversive–passages is the one below, from the Doctrine and Covenants. See if you like it, too. It is closely related to my Unitarian-Universalist sermon “So You Want to Save the World.” To generalize its meaning, and make it relevant even to those who (like me) do not believe in the supernatural, I replaced “the priesthood” with “hierarchical position”:
No power or influence can or ought to be maintained by virtue of [hierarchical position], only by persuasion, by long-suffering, by gentleness and meekness, and by love unfeigned; by kindness, and pure knowledge, which shall greatly enlarge the soul without hypocrisy, and without guile—
Enabling Deeper Negative Rates by Managing the Side Effects of a Zero Paper Currency Interest Rate: The Powerpoint File
Link to the Wikipedia article on the International Monetary Fund
The European Department of the IMF is understandably quite interested in negative interest rate policy. I was invited to give two presentations there today. In addition to my standard presentation
which I will give in the afternoon, I am giving a brand new presentation in the morning, that is the kernel of a new paper with Ruchir Agarwal and also the inspiration for my much shorter presentation at the Brookings Institution (Hutchins Center on Fiscal & Monetary Policy) conference on negative rates on Monday:
Enabling Deeper Negative Rates by Managing the Side Effects of a Zero Paper Currency Interest Rate
You might be interesting in taking a look at this Powerpoint file I am linking to immediately above.
I gave a presentation on negative interest rate policy at the IMF once before, on May 4, 2015, but it was a different presentation to a different group.