Saturday, March 19, 2016
German Response to Negative Interest Rates - LewRockwell
German Response to Negative Interest Rates - LewRockwell
The Japanese response to negative interest rates was to buy personal safes. The German response is to pull money out of bank accounts and stick it in safe deposit boxes.
Both are perfectly understandable reactions to the prospect of having
to pay interest to a bank for holding deposits. It is particularly
interesting in Germany, where the Bundesbank a few years ago admitted
that the average real rate of return on savings deposits has been negative
for nearly the past 40 years. Now that nominal rates have turned
negative too, the facade of savings accounts as a safe place to park
money to earn a little bit of income has finally been ripped away.
The major risk, of course, is that because of the fractional-reserve
banking system, if enough depositors withdraw their funds the bank
collapses. If a bank maintains a reserve of 10% and depositors withdraw a
total of 10% of their deposits, the bank will have no money left to
satisfy withdrawals, pay checks drawn on the bank’s accounts, etc., and
will have to cease operating. In fact, even less than 10% of deposits
being withdrawn can start to lead to problems with payments. If that
were to happen the bank would have to start coming to the discount window
for help. If it had to rely on discount window lending enough times,
regulators might look to shut the bank down preemptively. If a big
enough bank goes down, or if enough banks find themselves in such a
situation, panic might set in and result in a bank run, with depositors
rushing to withdraw their money while they still can. Witness the situation in Cyprus a few years ago.
That is the risk that the move toward negative interest rate entails,
but one which no central bank is willing to admit. It must be sitting
at the back of policymakers’ minds, but they probably think that if they
don’t discuss the possibility of a total collapse of the banking system
then it won’t ever happen. We are in uncharted waters right now, with
central bankers who have failed over and over again yet who still
possess an unshakable confidence in their own knowledge, expertise, and
abilities, the “pretence of knowledge”
which Hayek so eloquently explained. A banking system collapse is
closer now than at any time previously, and probably closer than anyone
suspects, which is why negative interest rates are so dangerous. All it
takes is just one more rate cut, one more move into a further negative
territory to push enough people off the edge, to get them to withdraw
their deposits, which will result in a severe banking panic. Central
banks are playing with fire when they institute negative interest rates
and we’re all at risk of getting burned.
German Response to Negative Interest Rates: Safe Deposit Boxes
By Paul-Martin Foss
Carl Menger Center
Carl Menger Center
March 19, 2016
Both are perfectly understandable reactions to the prospect of having
to pay interest to a bank for holding deposits. It is particularly
interesting in Germany, where the Bundesbank a few years ago admitted
that the average real rate of return on savings deposits has been negative
for nearly the past 40 years. Now that nominal rates have turned
negative too, the facade of savings accounts as a safe place to park
money to earn a little bit of income has finally been ripped away.
The major risk, of course, is that because of the fractional-reserve
banking system, if enough depositors withdraw their funds the bank
collapses. If a bank maintains a reserve of 10% and depositors withdraw a
total of 10% of their deposits, the bank will have no money left to
satisfy withdrawals, pay checks drawn on the bank’s accounts, etc., and
will have to cease operating. In fact, even less than 10% of deposits
being withdrawn can start to lead to problems with payments. If that
were to happen the bank would have to start coming to the discount window
for help. If it had to rely on discount window lending enough times,
regulators might look to shut the bank down preemptively. If a big
enough bank goes down, or if enough banks find themselves in such a
situation, panic might set in and result in a bank run, with depositors
rushing to withdraw their money while they still can. Witness the situation in Cyprus a few years ago.
That is the risk that the move toward negative interest rate entails,
but one which no central bank is willing to admit. It must be sitting
at the back of policymakers’ minds, but they probably think that if they
don’t discuss the possibility of a total collapse of the banking system
then it won’t ever happen. We are in uncharted waters right now, with
central bankers who have failed over and over again yet who still
possess an unshakable confidence in their own knowledge, expertise, and
abilities, the “pretence of knowledge”
which Hayek so eloquently explained. A banking system collapse is
closer now than at any time previously, and probably closer than anyone
suspects, which is why negative interest rates are so dangerous. All it
takes is just one more rate cut, one more move into a further negative
territory to push enough people off the edge, to get them to withdraw
their deposits, which will result in a severe banking panic. Central
banks are playing with fire when they institute negative interest rates
and we’re all at risk of getting burned.
Thursday, March 17, 2016
Wednesday, March 16, 2016
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