The Fed Wants to Test How Banks Would Handle Negative Rates

Point a) is actually heavily contended. Fraud is not estimated by any credible economist to have had a major (>5%) impact on the financial crisis. In a market situation there is always a disagreement about whether or not a security is worth what it is worth, hence the sale taking place (both sides think they are getting a good deal). There was disagreement about AAA securities of course, but it's very unclear if that is due to market valuing stuff differently or outright fraud. The contents of the loans were not lied about, whether or not they were AAA was not lied about, whether or not they should've been AAA is up for contention.

I don't see your point with b) at all.

If you're a bank it's not like there are a ton of avenues for you to invest your money, and outside of mortgages there aren't a lot of ways to pass the money onto consumers. So if what you want is the bank to pass its new found money onto consumers that's the avenue you want. Unfortunately the last time we did that a lot of unqualified people got loans. So my point is it's tricky.

The economy was destroyed by inflation of a particular asset class driven in part by irrational beliefs about that asset class (housing) [1], misunderstanding of large scale risk [2], fraud in the market from players on all sides [3], and deployment of financial instruments which pushed a huge amount of money into the market [4].

Many actions made the lending crisis worse, but it would not have come about without the huge pool of money that went looking for debt. [5]

The point is, it's really easy to make things worse rather than better with a huge amount of money.

1. "Homes never lose value" https://books.google.com/books?id=i2FKCAAAQBAJ&lpg=PT115&ots...

2. "Real Estate Risk Model Inadequate" http://pages.stern.nyu.edu/~lpederse/papers/MeasuringSystemi...

3. "Fraud in Real estate Market" http://www.nytimes.com/2015/02/13/upshot/how-mortgage-fraud-...

4. "Novel financial instruments in home lending" https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf Page 127 (156 in pdf)

5. https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf Page xxv (26 in pdf)

I disagree, I think the desperation for jobs will increase demand on colleges and universities and the availability of student loans make that possible. Colleges have been able to, and will continue to, charge whatever students can be loaned.

s/millenial/millenials that have not yet paid off their student loans/

It would have been fun to galavant around Europe for fun instead of paying off my loans, but I guess I'm the sucker for being responsible.

I'm totally fine with people being able to refinance their loans to market rates, if those rates happen to be negative then good for them. I'm annoyed by this prevailing view that everyone with student loans are unemployed and can't pay them back. I know plenty of people with lots houses, cars, and taking vacations that haven't paid off their student loans yet. Outstanding balance left is not a good measure of the loan's burden or the circumstances under which the student took out the loan.

> The only incentive that will effectively cause companies to pay their employees better is more demand for labor

Or wage regulations (increasing the minimum wage)

Or labor organization (ie Germany)

Or tax regulations (shift tax incentives from machinery to labor)

> which is most likely to be caused by increased economic growth.

Growth is over my friend, at least the growth that would be necessary for wage inflation (ie Japan). EDIT: We can argue this point if you'd like, in a thread about the strongest world economy planning for negative interest rates, while other central banks have already gone (and continue to hold) at negative rates (can't "push the string"!, ie stoke demand with free money).

I am not an economist but I am pretty sure you could design tax policies that make it more attractive to pay higher salaries for the average worker or maybe give them shares in the company.

Can you imagine how much demand there would be if average wage growth would have kept up with productivity? People who make 30000/year would spend much more if they had 40000/year. I don't think a CEO's behavior will change much if he has 30 million or 40 million.

Obviously this won't happen but it's a thought that should be brought up from time to time.

I was under the impression that State Schools were also increasing tuition at a higher rate than inflation.

http://www.bloomberg.com/news/articles/2014-11-13/college-tu...

> One thing to keep in mind, they're young. If they save the extra money, they've got a loooong time for compound interest to work on those dollars.

But isn't that the exact opposite of what you want to happen? It you want to stimulate the economy, you want people to spend more money now. College graduates taking the money they save from reduced loan payments and putting it in a 401k doesn't do that, but giving a formerly unemployed person a job so they can buy new clothes and a car does.

It seems in my uneducated opinion like the whole system would rely heavily on "you scratch my back, I'll scratch yours". Anyone more knowledgeable have insight into that?

> The whole independent claim is just smoke and mirrors.

No, its actually legally substantive (though its more independent within the government than independent of the government.) Within its scope of granted authority, the Fed can (and does, regularly) act independently of the President and Congress. OTOH, actions outside of the Fed's legal powers require actions by Congress and/or the Executive Branch.

Now, certainly, the Fed, the President, and the Congress all interact and share their opinions, preferences, etc.

The specific truth is that the Fed has fewer constraints on its policy decisions than the Dept. of Education does.

The Dept. of Education's policy decisions are tightly constrained by Congress. If there's a law on the books giving the DoE freedom to determine student loan interest rates, then they can. I don't think such a law exists, though, so the Congress would need to pass one.

The Fed was created by Congress, and has a multi-part mission that it must meet, which has been set by Congress. But beyond that, it has great freedom to determine how to meet that mission on a day-to-day basis.

The Fed is part of the federal government, though. It even has its own federal police force.

Strictly speaking, it's not independent of "the government" so they do feel like part of the government. Certainly they feel like "part of the team" when it comes to governance.

However, the Fed often dramatically disagrees with Congress and/or the President when it comes to the best ways of fulfilling their shared values. Witness the consistent complaints from Congress over Fed policies like QE.

> The whole independent claim is just smoke and mirrors.

It's a lot more than that and has a legal basis. If the Fed weren't legally independent, I'm quite sure that Congress would have forced it to adopt different policies than it has.

Oh wow, you cannot fathom how much I love this notion.

If the Fed started buying up Student Loan Paper at even half the rate of the MBS program - let's go with $30 billion a month - I would probably faint out of disbelief because that action might actually benefit the economic engine of the United States.

I'm not sure I understand. It's not like the Fed would just buy the loans and retire them. People would still be on the hook to pay them off. All that does is let the banks get theirs now instead of having to write a good loan and wait for it.

Yes, it worked. The stock market is back up, and employment numbers "look good" (I mean a lot of that is workers getting discouraged, but still, the fed has achieved its mandate).

But how long will the stock market still be up, and why is it that over the course of those years the rich have gotten richer and the poor have gotten poorer? Don't suppose it had anything to do with directly redistributing money upwards?

A couple trillion dollars was used to buy up securities that are realistically worth $0 in pretty much every timeframe for 100 cents on the dollar, cleaning up bank balance sheets. This allowed them to continue to speculate on all sorts of things, like housing, commodities, etc, looking for returns (some of it probably saw its way to silicon valley too). It was passed on as easy money to corporations, who mostly used it to do stock buy backs that pretty much do nothing for "the economy" while lifting the stock market.

As for employment, if you actually look at the numbers, its people over 55 who can't afford to retire doing service jobs. The participation rate is trash and young people are fucked.

#recovery

Those are political stories.

For me, the question of whether it worked is scientific. Did the people who proposed the stimulus correctly predict the future results of it?

No. Nobody predicted our current economy, and the prediction's accurancy get even worse if we're about to slide into another recession in the next six months.

Of course you can argue that what we did was better than some hypothetical. That's so easy that it's not even an argument, which is why I don't consider it. What I observe is that the economy did not react as expected, we have not recovered anywhere near as much as predicted, interest rates are still being held low and we're talking about them going negative (again, I recall no predictions that such measures would be necessary seven+ years later), and a wide variety of indicators that were supposed to turn positive never have, or just barely have, shortly before what is very likely a recession.

The theories aren't working. Their predictions don't come true. Given that the theories don't work, it is scientifically foolish to then use those theories to themselves predict what couldhave shouldhave happened if some other course of action was taken, since the theories are already visibly nonfunctional. It is circular logic to use the broken theories to predict that the broken theories told us the right thing to do. This probably goes a long ways towards explaining why economics is still the "dismal science". (Though, to be sort of fair, economics does not have a lock on that error.) I don't have to have a better theory to say that; I need only have predictions in my hand and their failure to come true.

Commodity prices have already crashed through the floor, seeing them crash further may actually start freaking people out.

Frankly I think we need to stimulate the demand side of things -- give people free money, and don't let the banks screw it up like the subprime mortgage crisis.

If the rates go negative enough banks will set up cash management tools where money is held as cash rather than on deposit at the bank (i.e. banks won't be able to lend against it).

The existing interbank system couldn't be used for that though, so a parallel reconciliation, netting, and transfer system would have to be set up and dealing with physical cash is fairly expensive (don't forget insurance). I wouldn't expect it unless rates go below -1% and maybe even further.

I am reading much of your premise to be related to checking accounts (check writing and automated bill pay). Most people don't carry a large balance there so a negative interest rate on those accounts will not really have a large impact.

Yet on savings accounts, or those accounts whose intent it is to be liquid yet remain relatively unused, could be impacted by this. Which at that point, again under your premise of robbery, a person is essentially wagering whether they would rather be guaranteed to be fleeced incrementally, or run the possibly of someday being taken for all of their savings. At that point I think you would see many people start to withdraw large amounts of savings, whether to be stored underneath a mattress or into bonds or some other investment, while still keeping an active checking account.

Yes, I'm sure. I certainly wouldn't stuff it in a mattress as cash, though. I'd start by finding a bank or credit union that didn't, as I'd be surprised if they all made that move at once. If that failed, I'd look towards accounts with a broker instead, or some other institution.

It seems to me that in this situation savings accounts would have the nominally negative rate, whereas checking accounts would have a nominal rate of zero. Since inflation affects the real value of both accounts equally, then the checking accounts would have a higher real rate.

Since both accounts are covered by FDIC insurance [0], it seems that the only difference (unless I am missing something) lies in the rate of return, thus ceteris paribus and the checking accounts have a better rate of return compared to savings accounts. Both have real negative rates, so the situation would be an active discouragement to hold the government-managed currency in any form.

Regarding cash holdings, you are right that they are probably a bad idea. However, if numerous banks could potentially experience a crisis beyond the intervention capabilities of the Fed and Federal government, then it would probably be more sensible to move the money into cash and store it in safety deposit boxes, possibly across multiple banks. This to me seems an unlikely scenario, but not necessarily impossible.

[0] https://www.fdic.gov/deposit/covered/

The relevant measure is "cash in hand" vs. "cash in checking account", not the absolute value change.

Do you have citation? Genuinely curious about this.

Yes. Which is why this is a stress test. Will the banks survive a financial crisis if the entire world switched over to negative rates?

Well, the Fed wants to know, which is why they're running this doomsday test scenario. The Fed currently expects to raise rates about 2 or 3 more times this year btw... so the scenario probably won't happen, but that doesn't change the fact that lead bankers are preparing for the worst.

In other words, the article is simply stating the following fact: big banks in America are thinking about various financial doomsday scenarios. I don't think that's a bad thing at all.

> Are you talking about the scenario where the banks deposit money to the Fed?

Yes, I thought that was what negative interest rates refer to.

> I was talking about the scenario where the Fed gives out a credit in exchange for securities.

Are you describing quantitative easing? Because my understanding that was just the Fed buying securities (usually government ones) on the open market at market prices like any other buyer. I think the big difference in the negative interest rate scenario is the selling bank would have less incentive to then take the cash and park it in the Fed afterward.

If it's a straight bailout, my guess is the Fed would be in a strong position to set the terms so it wouldn't have to pay the bank to take the money.

I think the vast majority of people still have "free checking."

Not all credit unions are immune to stupid fees. The "low aggregate balance fee" is alive and well locally. People wonder why Walmart is gaining popularity.

You can find free chequing accounts though and if you're careful enough to not get caught by overdraft fees, they're the way to go. I'm Canadian and I know 2 banks here that do it, but I'd imagine similar exists in the US?

There is at least one word (most likely "since" before "2008"), as well as examples and argument on the lack of legal mandate, missing from your argument.