Huh, negative interest rates

[El_Machinae]

The ECB cut all its main rates to record lows in a drive to fight off the risk of Japan-like deflation and bring down the euro's exchange rate. For the first time, it will charge banks 0.10 percent for parking funds at the central bank overnight.

http://money.ca.msn.com/investing/n...euro-zone-economy-seeks-to-force-bank-lending

Now, I knew you could effectively do so by promising inflation rates higher than payouts, but still, this is a surprise. What an interesting tangent. There's been talk of this for awhile, but I didn't know it would ever be politically possible.

 

[Kyriakos]

^ It is happening cause now in most of the EU the citizens view it as unsafe to have their savings in the local banks or smaller other banks, due to the nice precedent of the EU robbing those accounts to pay off national debt. Isn't that nice?

The move will lead to more money being siphoned from the EU to banks in less dictatorial regimes nearby, such as Switzerland. It won't save the euro currency, and it doesn't stand to logic that any leading economist working for the EU thinks it would.

 

[Borachio]

Didn't Switzerland have negative interest rates for foreign depositors sometime ago?

 

[Kaitzilla]

http://www.ecb.europa.eu/home/html/faqinterestrates.en.html

Q: Isn't it possible for banks to avoid the negative deposit rate? For example, can't they simply decide to hold more banknotes?

A: If a bank holds more money than is required for the minimum reserves and if it is not willing to lend to other commercial banks, it has only two options: to hold the money on an account at the central bank or to hold it as cash. But holding cash is not cost-free either − not least since the bank needs a very safe storage facility to warehouse the banknotes. So it is unlikely that any bank would choose to do this. The more likely outcome is that banks either lend money to other banks or pay the negative deposit rate.

If only banks had one of those Vault thingies to store their money in.

I can't wait to see how this plays out.
Either the banks start making much riskier loans with their excess reserves, or they pay the central bank to hold their money for them.
Lose/lose situation in my opinion, but the central planners know best. Can't have prices going down for any reason.

 

[Kyriakos]

^I thought that banks were supposedly there (from the public's pov) to keep money safely stored. I guess they are victims of the over-needy citizens as well. Poor banks, oligarchs, presidents etc.

 

[Zelig]

That doesn't seem like a great way to do it.

I like Mankiw's idea:

Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

 

[amadeus]

Convert all your money to coins.

amadeus 1, Mankiw 0

 

[El_Machinae]

It's an inflationary policy, so buying nearly anything becomes a good idea. The sucker who sold you gold suddenly wants to spend that cash.
Mankiw's idea would create amazing velocity. And one-year debt instruments would be worth a ton more. 300 day debt-instruments? Maybe not so much.

 

[Cutlass]

http://www.ecb.europa.eu/home/html/faqinterestrates.en.html





If only banks had one of those Vault thingies to store their money in.

I can't wait to see how this plays out.
Either the banks start making much riskier loans with their excess reserves, or they pay the central bank to hold their money for them.
Lose/lose situation in my opinion, but the central planners know best. Can't have prices going down for any reason.

There's a limit to how big those bank vaults are. Making them bigger is expensive.

 

[Samson]

Q: Isn't it possible for banks to avoid the negative deposit rate? For example, can't they simply decide to hold more banknotes?

A: If a bank holds more money than is required for the minimum reserves and if it is not willing to lend to other commercial banks, it has only two options: to hold the money on an account at the central bank or to hold it as cash. But holding cash is not cost-free either − not least since the bank needs a very safe storage facility to warehouse the banknotes. So it is unlikely that any bank would choose to do this. The more likely outcome is that banks either lend money to other banks or pay the negative deposit rate.

So am I reading this right? If a bank takes in more money than it lends out one day, it has to either convert that "electronic money" into bank notes and keep them somewhere, or "lend" it to the ECB at negative interest rates?

In this day and age when many individuals do not use cash, banks themselves cannot keep money electronically and have to have it in physical readies? What about the "money than is required for the minimum reserves"? Do they have to keep that as actual pieces of paper somewhere?

 

[Borachio]

It seems that they do, though I agree it's odd.

But if they didn't they could just invent the stuff as they wanted.

Actually, I rather think they do, anyway.

What does it mean "to convert electronic money into bank notes"? How's it done?

 

[Zelig]

Do they have to keep that as actual pieces of paper somewhere?

Depends on jurisdiction, it certainly isn't necessary in Canada.

 

[Samson]

Depends on jurisdiction, it certainly isn't necessary in Canada.
__________________
Do you like Bitcoins? Join #fiftychat for free Bitcions!

I liked the juxtaposition of your sig, this topic did make me think that this isn't a problem you would have with bitcoins.

 

[Cutlass]

Banks keep some cash on hand against daily transactions. But as daily transactions don't have a lot of cash going out, except from ATMs, that isn't a very large amount. How much they would hold would depend on their past experience. Banks can also get an infusion of cash fast by way of the armored car companies. So don't really have to keep much.

 

[Samson]

Banks keep some cash on hand against daily transactions. But as daily transactions don't have a lot of cash going out, except from ATMs, that isn't a very large amount. How much they would hold would depend on their past experience. Banks can also get an infusion of cash fast by way of the armored car companies. So don't really have to keep much.

The way I read the quote was that they had to keep / convert any cash they had "left over" to cash (or lend it at negative interest rates) because they could not keep it electronically. That sounded odd, and I kind of expect my interpretation to be wrong because the alternative sounds so odd.

 

[Cutlass]

The way I read the quote was that they had to keep / convert any cash they had "left over" to cash (or lend it at negative interest rates) because they could not keep it electronically. That sounded odd, and I kind of expect my interpretation to be wrong because the alternative sounds so odd.

I'm not clear on that. But there would be costs to converting it to cash which might discourage doing that.

 

[FriendlyFire]

Convert all your money to coins. Real Estate
Friendlyfire 1, amadeus 0, Mankiw 0

Fixed.
All rental income from real estate must be paid in silver ,bananas ummm help me out please ?

 

[Zelig]

Convert all your money to coins.

amadeus 1, Mankiw 0

Get rid of coins entirely.

Fixed.
All rental income from real estate must be paid in silver ,bananas ummm help me out please ?

Even though real estate isn't a particularly good investment, that would still be 1 for Mankiw. The goal isn't to make you 10% less wealthy, it's to motivate you to not hold cash.

 

[timtofly]

Where does it say anything that banks HAVE to park their money? The reason they park money is to make money. The central bank decided that to discourage banks from using them, they would create a negative incentive. The banks could hold on to their money and make nothing. Or they could loan it out or find other ways to invest it. Hopefully by doing something else it would stave of deflation. Would banks loosing money do the same thing?

 

[onejayhawk]

Fixed.
All rental income from real estate must be paid in silver ,bananas ummm help me out please ?

Pizza. Cavlancer can fix you up.

J