Negative rates: Should we take Alan Blinder seriously? Or José Viñals?

I recently argued that negative rates are just another tax on the private sector, and are no incentive for bank lending to households and firms. In my view, with interest rates below zero the economy will freeze up. Alan Blinder has argued exactly the opposite. For Blinder,

If the Fed turned the IOER [interest on excess reserves] negative, banks would hold fewer excess reserves, maybe a lot fewer. 

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ECB: What do negative interest rates do?

Responding to press conference questions, ECB President Mario Draghi has said the ECB is ‘technically ready’ to bring interest rates below zero.

Yesterday, Bloomberg reported rumors that the ECB is ready to act. Today, Draghi denied that there is anything new happening on this front, and ECB Board member Asmussen said he’d be cautious about using negative rates.

While traders keep trying to guess Draghi’s next move, one may want to consider, one more time, the effects of negative interest rates.
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Big news from Frankfurt…or not?

“ECB Cuts Rates Unexpectedly as Low Inflation Threatens Recovery”

“The ECB cut the main interest rate at which it lends to banks to 0.25%”

“The ECB showed the need to act”

Wait a minute.

The interest rate that matters for monetary policy (this is the rate on loans between banks) is already below 0.1%, so today’s move is not going to get this any lower!

Today’s move does nothing except sending another signal that the Euro economy is in full deflation, and the ECB is likely to keep the current rates that low for a longer time.

No actual change of interest rates.

And no impact on the real economy, anyway.

Just more evidence that the overall European deficit is too low!

George Soros’s (incomplete) proposal to save Europe

George Soros has formulated one more call for Eurobonds here.

I’m in agreement with most of it.  Yet, not all.

  • Divergence in the Eurozone was largely caused by Germany not complying with the 2% inflation rule. Deflation, ever since 1999, gave Germany a means to lower the real exchange rate and steal demand from its partners (beggar-thy-neighbor).
  • There is nothing good with Greece running a surplus: A surplus means that financial assets owned by the private sector are reduced by the same amount (as a matter of accounting).
  • Eurobonds would compare well with U.S. Treasuries if and only if the ECB agreed to be the lender of last resort of the Eurozone
  • Remedying the euro’s main design flaw requires more than Eurobonds: There must be, at a minimum, a means to let automatic fiscal stabilizer work. Today, fiscal stabilizers cannot work and fiscal policy is pro-cyclical, as described in the chart here.
  • Hitler was the outcome of harsh reparations plus the 1931 crisis that was caused by austerity and the Reichsbank not willing to fund German Treasuries for fear of inflation.