January 26, 2013

FACING UP TO DEFLATION:

Making the case for negative interest rates (Allan Dodds Frank, 1/25/13, Fortune)

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. [...]

While citizens fail to understand the positive role the Federal Reserve played, 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.

"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?'"

The problem, and the proximate cause of our last three soft economic patches, is that we haven't moved on from the 70s.  We require the Fed to be vigilant about an inflation threat that no longer exists. Thus, it periodically cranks rates--especially when there's a new chairman--into the teeth of deflationary pressure.



Enhanced by Zemanta
Posted by at January 26, 2013 5:55 AM
  
blog comments powered by Disqus
« HIS COME TO W MOMENT: | Main | GET RID OF LIMITS AND THERE'S NO NEED FOR ILLEGAL IMMIGRATION NOR AMNESTY: »