The Wall Street Journal's Big Page One Monetary Policy Mistake

Ian Talley and Brian Blackstone.   (I couldn’t validate any Google image of Raymond Zhang)

Ian Talley and Brian Blackstone. (I couldn’t validate any Google image of Raymond Zhang)

Working at the Wall Street Journal, Ian Talley, Brian Blackstone and Raymond Zhang are near the top of the heap for reporters. And I evidenced in my post “Will the ECB Go Negative?” my admiration for Brian Blackstone’s reporting in “ECB Mulls Bolder Moves to Guard Against Low Inflation: Officials Indicate They Will Consider Negative Interest Rates, Asset Purchases.” So it is disappointing to see Ian, Brian and Raymond write last Monday in "Global Signs of Slowdown Ripple Across Markets, Vex Policy Makers“ something that is seriously misleading, whether from ignorance, depending too much on what central bank officials and other government officials say, or an unwillingness to complicate their narrative. (You can jump over the paywall just by googling the title.) They write:

More than five years after the recession, officials are facing a difficult policy environment: Major central banks, which stepped up repeatedly to ease fears and energize markets, are reaching the limits of their powers.

Except perhaps due to legal limitations that Ian, Brian and Raymond do not address, this is not true. As I told at attentive audience at the European Central Bank in July, the European Central Bank could cut its target rate to negative 1.25% immediately, as long as it charges a time-varying fee when private banks deposit paper currency at a cash window of the European System of Central Banks. The European Central Bank should do exactly that. 

After the title, the first slide in my Powerpoint file "Breaking Through the Zero Lower Bound” says

The zero lower bound is a policy choice, not a law of nature. 

Here is a list, copied from my post “Electronic Money: The Powerpoint File” of places I have presented or am slated to present this seminar (other than the University of Michigan, where I have presented it multiple times to different audiences):

  • Bank of England, May 20, 2013
  • Bank of Japan, June 18, 2013
  • Keio University, June 21, 2013
  • Japan’s Ministry of Finance, June 24, 2013
  • University of Copenhagen, September 5, 2013
  • National Bank of Denmark, September 6, 2013
  • Ecole Polytechnique (Paris), September 10, 2013
  • University of Paris, September 12, 2013
  • Banque de France, September 13, 2013
  • Federal Reserve Board, November 1, 2013
  • US Treasury, May 19, 2014
  • European Central Bank, July 7, 2014
  • Bundesbank, July 8, 2014
  • Bank of Italy, July 11, 2014
  • Swiss National Bank, July 15, 2014
  • Princeton University, October 13, 2014
  • Federal Reserve Bank of New York, October 15, 2014
  • New York University, October 17, 2014
  • European University Institute (Florence), October 29, 2014
  • Qatar Central Bank and Texas A&M University at Qatar joint seminar, November 17, 2014

There has also been quite a bit of discussion of my proposal in online journalism, including quite a few interviews listed in my bibliographical post “How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide.” To quote Paul of Tarsus, “these things were not done in a corner." 

I have now been to enough central banks that I can talk about their reaction without revealing inside information about any particular central bank. Both the staff in each central bank and the 7 members of monetary policy committees who heard my arguments took my proposal for a time-varying paper currency deposit fee very seriously. Some in each category want to take things to the next step of preparing for possible implementation. Everyone recognizes that subordinating paper currency to electronic money is a big step, and not one to be taken lightly.  

There are two reasons why I think that the kind of thing I propose will in fact happen. The first is that technical progress will lead to an increased fraction of transactions happening in electronic form in the future–that is with credit cards, debit cards, electronic transfers, etc. The second is that there are many central banks in the world, each of which faces a different political situation. Once one central bank puts a time-varying paper currency deposit fee into its toolkit, it becomes much easier for other central banks to do so.

To understand how different the political situations faced by different central banks can be, consider a central bank in a nation that has been running about 6% inflation for quite some time that decides it is time to go down to a lower level of inflation. If as part of bringing its inflation rate to zero, that central bank puts in place the machinery for breaking through the zero lower bound with a time-varying paper currency deposit fee, it will be hard to accuse that central bank of following a "soft-money policy.” And it will be hard to complain about the possibility of future negative interest rates during a time when the central bank has raised interest rates to begin gradually reducing its inflation rate.    

There are many practical reasons why people would want to know about the possibility of (a) negative interest rates, (b) an exchange rate or paper currency that is away from par, and © inflation targets well below 2% for major central banks at some point in the future. Investors in the stock market would care. Bond traders would care. Bankers would care. Anyone writing a debt contract would care. The Wall Street Journal should clue its readers in–as many other news organizations have.

The overall tenor of Ian, Brian and Raymond’s article is to talk about the many different approaches that are being discussed to deal with the persistent slump in Europe. But they missed the best and most straight forward approach: for the European Central Bank to cut it target rate to -1.25% with the help of a time-varying paper currency deposit fee.

The discussion in my seminar at New York University last Friday made me appreciate a little more the virtues of my very first column on eliminating the zero lower bound: “How Subordinating Paper Currency to Electronic Money Can End Recessions and End Inflation.” And you can see the later development of the ideas in the Powerpoint file and in the other posts I lay out in “How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide.”