The Globe and Mail Gets It Right on Negative Interest Rate Policy, Thanks to Ian McGugan


Link to Ian McGugan’s author page at the Globe and Mail

Ian McGugan of Canada’s premier newspaper, the Globe and Mail, interviewed me last Tuesday evening, February 16, 2016. That interview is reflected in his article “Negative Rates: Recipe for Growth or Desperate Gimmick” (paywalled). Ian gives an excellent treatment of the issues surrounding negative interest rate policies, quite appropriately emphasizing the current controversy as a “brawl.” On my side, which views negative interest rates as a crucial part of the monetary policy toolkit, he first quotes Narayana Kocherlakota’s blog post that I discuss in “Narayana Kocherlakota Argues That Negative Interest Rates Should Be Seen as Part of Conventional Monetary Policy. ” Ian McGugan sets up the quotation from Narayana thus:

Defenders of NIRP insist the program simply needs time to take hold. The real problem, they maintain, is the timid way that subzero policies have been rolled out.

Central banks, according to these proponents, should trumpet negative rates. Policy makers should vow – loudly and aggressively – to stick with NIRP until expectations have been reshaped and the economy is booming once again.

“Here’s the wrong way [for central banks] to communicate: Keep saying that negative is a purely emergency setting that will be abandoned shortly,” writes Narayana Kocherlakota, a former president of the Minneapolis Federal Reserve Bank who now teaches economics at the University of Rochester. “Here’s the right way to communicate: Keep saying that all available tools, including negative interest rates, will be used as is needed to return employment and inflation to desirable levels as rapidly as possible.”

Later, on the pro side, Ian quotes Nick Rowe:

“There has never been anything wrong in theory with charging negative rates,” says Nick Rowe, a professor of economics at Carleton University and an authority on monetary policy. “The objection was always this notion that people would just withdraw their money from the bank and go to cash, which pays zero interest but at least doesn’t impose a negative rate.”

However, a rush to paper money hasn’t materialized in the countries that have imposed negative rates, perhaps because the rates have been only mildly negative. …

Economists acknowledge that it’s administratively tricky to impose negative rates, but they don’t see the problems as insurmountable. Prof. Rowe argues that the important factor for any lender is the spread between its deposit rates and its lending rates, not whether those rates happen to be negative or positive.

Finally, on the pro side, Ian quote me:

“It’s relatively simple for a bank to adjust its business model to still make money with negative rates,” agrees Miles Kimball, a professor of economics at the University of Michigan. A long-time advocate for negative rates, he argues that policy makers should be far more aggressive in pushing down lending costs.

He says banks should realize their real enemy is the current new normal of anemic growth. The failure of the global economy to revive after years of zero-rate therapy is conclusive evidence that stronger medicine is necessary, he argues. “If you don’t take the right dosage of a drug, it doesn’t work.”

Both Europe and Japan should immediately push rates even lower, he says. While negative rates of, say, minus 2 per cent or even lower might shock observers at first, they would be in keeping with what history tells us is necessary.

In the past, central banks have often dropped rates by six percentage points or more to bring about recoveries. The only way to achieve a similar effect in today’s low-rate environment would be to take rates strongly negative.

Wouldn’t that unfairly punish ordinary mom-and-pop savers? Not at all, he says. “Savers would be far better off if we had brief periods of deep negative rates that would quickly restore growth, rather than long periods – like now – of near-zero rates, where nobody makes any real return for years.”

To be sure, not everyone might welcome the details of how Prof. Kimball plans to lower interest rates far below zero. To avoid the possibility that savers would flock to cash rather than take a beating on the “electronic” currency in their bank account, he would impose a discount on folding money.

“Paper currency could still continue to exist, but prices would be set in terms of electronic dollars (or abroad, electronic euros or yen), with paper dollars potentially being exchanged at a discount compared to electronic dollars,” he writes.

A situation where paper money might not be worth its face value would be disturbing for most people and it’s not the only disquieting aspect of a subzero strategy. …

Prof. Kimball acknowledges that there are big psychological barriers to negative rates, and suggests there would be ways to get around the worst side effects. Ideally, he says, negative rates would apply mostly to institutional and business accounts while leaving most ordinary savers and borrowers untouched. “Our monetary system does change every 50 years or so, so change is possible,” he says. “People never thought we would go off the gold standard, but we did.” As disruptive as negative rates might seem, he argues they are vital to restart growth. Most of Bay Street would bitterly disagree. Whichever side wins this argument is likely to shape the course of monetary policy for years to come.

(Bay Street is Canada’s counterpart to Wall Street.)

Ian’s article is a great source for many of the arguments against negative rates as well. Ian does not stint in reporting those con arguments. I should deal with those arguments more on another occasion. For now, let me emphasize that I have responded to the worry that negative interest rates will hurt bank profits in my How to Handle Worries about the Effect of Negative Interest Rates on Bank Profits with Two-Tiered Interest-on-Reserves Policies and again in If a Central Bank Cuts All of Its Interest Rates, Including the Paper Currency Interest Rate, Negative Interest Rates are a Much Fiercer Animal.”

Finally, for those of us who get remarkably little Canadian news because our reading focuses on news outlets in Canada’s neighbor, the United States of America, let me note this from Ian’s article:

Stephen Poloz, Governor of the Bank of Canada, delivered a speech in December in which he mulled the potential for taking Canada’s key rate to minus 0.5 per cent, although he emphasized such a move wasn’t imminent.

Ian covers a lot of ground in his article. It sets a very positive example for negative interest rate journalism.