What happens when you let academics influence the real world...

[LARS]

And this is the problem when you let academics, with no real world experience, set monetary policy. They assumed charging banks negative rates would cause them to lend. Never occurred to the brain trust that instead of making poor loans, instead, the banks would just charge more on good ones to cover the negative cost of funds being charged by Central Banks. Thus, hamstringing economy.

Good read:

Economics: The zero bound *is* absolute, after all - Business Insider


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[dallas27]

As it is uncharted territory, i don't think it matters who made the call, but now we have new macro data, and can study it and put the tool in the tool box. Oh, and the world didn't end either, so there is that.


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[cyber888]

This would not happen in the US. You're wrong about Academics - This is a European thing, not about Academics. Just like lending more money to Greece - who does that ? You have to understand EU socio-politics.

And this is the problem when you let academics, with no real world experience, set monetary policy. They assumed charging banks negative rates would cause them to lend. Never occurred to the brain trust that instead of making poor loans, instead, the banks would just charge more on good ones to cover the negative cost of funds being charged by Central Banks. Thus, hamstringing economy.

Good read:

Economics: The zero bound *is* absolute, after all - Business Insider


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[LARS]

This would not happen in the US. You're wrong about Academics - This is a European thing, not about Academics. Just like lending more money to Greece - who does that ? You have to understand EU socio-politics.

First of all it is a Japan and Europe thing, which currently (thankfully for now) leaves the US odd man out. Second, you are incorrect if think the FED has not had their staff burrowing away on this topic. Finally, lending to Puerto Rico is akin to Greece just as an example. But other than that, yeah what you said...


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[scrinch]

Can someone explain this simply? Is it:
Commercial banks were supposed to prefer to lend at low rates to customers rather than leaving their money on deposit with central banks <earning> a negative interest rate, but instead they left money on deposit, paid the negative interest, and made up for having to pay the negative interest by charging existing customers new fees?

-

 

[Whisper66]

This would not happen in the US.....

....you are incorrect if think the FED has not had their staff burrowing away on this topic.

For those interested, here's summary of Yellen's recent comments on the Fed's consideration of negative interest rates in the US.

The Feds investigated in 2010 whether to use negative rates. Apparently there were legal and other questions they had about using them and had doubt whether it was the right way to go. "We got only to the point of thinking it wasn't a preferred tool," she said. "We were concerned about the impact it would have on money markets, we were worried it wouldn't work in our institutional environment."

Watch 1st video for more of her comments. Suggests negative interest rates are still on the table as a possible tool but would need further investigation.

 

[Al in Ohio]

And this is the problem when you let academics, with no real world experience, set monetary policy.

Good read:

Economics: The zero bound *is* absolute, after all - Business Insider


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I read the article. Why are you bashing academics? Didn't read one thing about policy being set by academics? That policy I'm sure was in fact instituted by those in the "real world". Just like "real world" bankers and brokers push lobbyists to change policy to favor them whether it's a bad policy that could bankrupt our entire nation. Academia has no power or play in monetary policy.


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[dallas27]

Fed will absolutely use it, if and when they think it is the best course of action.


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[M Paquette]

It is pretty well understood by both academics and working economists that the negative instance rate is a last ditch effort item for monetary policy, in the absence of any practical changes in fiscal policy. Fiscal policy changes can have a much more significant effect near the zero bound of interest rates, but tend to be under the control of political, rather than economically rational forces.

See the various example countries named previously.

 

[cyber888]

You are wrong! You have absolutely no clue and no idea whatsoever what you are talking about. The Fed is going to increase interest rates, not decrease it. You wanna bet ??

No, you are absolutely wrong about comparing Puerto Rico to Greece. Greece is a sovereign country. Puerto Rico is part of the United States. You are comparing apples to oranges. And you have no idea about the stark difference between the economic structure of Greece and Puerto Rico. Please! Foreign currency debt does not even affect Puerto Rico, as they use US dollars. It's very different for Greece as they were almost forced out of the Euro. Again, you don't know what you are saying when you make these comparisons.

And as another comment on this thread mention, the article never mentioned academics. Monetary policy are the domain of real world bankers. I've been in charge of monetary policy - NO Academics ... Real World Bankers and Professional Bankers who work for the central bank, YES!
You are very very wrong.

First of all it is a Japan and Europe thing, which currently (thankfully for now) leaves the US odd man out. Second, you are incorrect if think the FED has not had their staff burrowing away on this topic. Finally, lending to Puerto Rico is akin to Greece just as an example. But other than that, yeah what you said...


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[Totoro]

Lately when I read about negative interest rates I try to construct a simple real world scenario and apply it to that. It shows the (to me) counterintuitive nature of monetary policy.

=>
I have some land, own it outright. A hundred apple trees grow on it. Every year these apple trees produce 20000 apples. I eat a lot of apples, but can't eat them all. 55 apples a day is a bit too much. I am happy and well fed though.

Now, a friendly person comes along and offers me the following deal: "You have nice trees. Let me take care of them for the next 3 years, and I keep all its fruit. At the end of the three years, you get back all your trees minus two of them. Those two trees I get to keep forever."

I agree to his proposal, even though I have no apples anymore to eat for three years, and lose two trees. I also run the risk of the friendly person not taking good care of my trees.

How can that be?
<=

The fun part (fun to me anyway) is to try and resolve the paradox by keeping the story as simple as possible.

 

[Gumby]

You are wrong! You have absolutely no clue and no idea whatsoever what you are talking about. The Fed is going to increase interest rates, not decrease it. You wanna bet ??

No, you are absolutely wrong about comparing Puerto Rico to Greece. Greece is a sovereign country. Puerto Rico is part of the United States. You are comparing apples to oranges. And you have no idea about the stark difference between the economic structure of Greece and Puerto Rico. Please! Foreign currency debt does not even affect Puerto Rico, as they use US dollars. It's very different for Greece as they were almost forced out of the Euro. Again, you don't know what you are saying when you make these comparisons.

And as another comment on this thread mention, the article never mentioned academics. Monetary policy are the domain of real world bankers. I've been in charge of monetary policy - NO Academics ... Real World Bankers and Professional Bankers who work for the central bank, YES!
You are very very wrong.

[MOD HAT ON] There are ways to disagree without being disagreeable. [MOD HAT OFF]

 

[Whisper66]

Lately when I read about negative interest rates I try to construct a simple real world scenario and apply it to that. It shows the (to me) counterintuitive nature of monetary policy.

=>
I have some land, own it outright. A hundred apple trees grow on it. Every year these apple trees produce 20000 apples. I eat a lot of apples, but can't eat them all. 55 apples a day is a bit too much. I am happy and well fed though.

Now, a friendly person comes along and offers me the following deal: "You have nice trees. Let me take care of them for the next 3 years, and I keep all its fruit. At the end of the three years, you get back all your trees minus two of them. Those two trees I get to keep forever."

I agree to his proposal, even though I have no apples anymore to eat for three years, and lose two trees. I also run the risk of the friendly person not taking good care of my trees.

How can that be?
<=

The fun part (fun to me anyway) is to try and resolve the paradox by keeping the story as simple as possible.

Good story. Maybe this is a good way to extend it.

Part of the deal is the Friendly Person (Fed) allows me (bank) to take any of the apples ($$) in their keeping to sell (lend to borrowers) anytime I wish. They will also give me more (quantitative easing) occasionally. If I could sell all the apples (lend all the $$ out to borrowers), I would be free of the Friendly Person fees (negative interest rate) and make a few bucks (interest rates I charge to customers) in the process. So I try.

Unfortunately I don't have enough customers (borrowers) that need apples (loans) so I'm stuck paying the fees that I never had to pay before on apples I didn't sell (positive interest rates brought me $$ before). Therefore I have to raise the cost of my apples (interest rates charged to borrowers) that I am able to sell to make up for the added fees I am paying to the Friendly Person (Fed) on the apples ($$) I don't sell (loan to borrowers). The higher cost of the apples (higher interest rates) turns off many of my customers (borrowers) so benefits (boosting of the economy) I get by using the Friendly Person has self limiting aspect. Those limits I only am able to determine by experience.

 

[Gatordoc50]

Carrots and sticks are used to make people do things that aren't likely in their best interest.

 

[dixonge]

Just finished the chapter on Greece in Michael Lewis' "Boomerang" - incredible stuff. Their GDP is close to Oregon, population near that of Ohio. Puts things in perspective...

 

[someguy]

Just finished the chapter on Greece in Michael Lewis' "Boomerang" - incredible stuff. Their GDP is close to Oregon, population near that of Ohio. Puts things in perspective...

For those who are too lazy to look up the populations:

Oregon: 4 m
Ohio: 11.6 m

 

[haha]

You are wrong! You have absolutely no clue and no idea whatsoever what you are talking about. The Fed is going to increase interest rates, not decrease it. You wanna bet ??

No, you are absolutely wrong about comparing Puerto Rico to Greece. Greece is a sovereign country. Puerto Rico is part of the United States. You are comparing apples to oranges. And you have no idea about the stark difference between the economic structure of Greece and Puerto Rico. Please! Foreign currency debt does not even affect Puerto Rico, as they use US dollars. It's very different for Greece as they were almost forced out of the Euro. Again, you don't know what you are saying when you make these comparisons.

And as another comment on this thread mention, the article never mentioned academics. Monetary policy are the domain of real world bankers. I've been in charge of monetary policy - NO Academics ... Real World Bankers and Professional Bankers who work for the central bank, YES!
You are very very wrong.

Sure about this?
https://en.wikipedia.org/wiki/Janet_Yellen

 

[Lsbcal]

Am currently rereading my copy of How to Win Friends and Influence People.

 

[dallas27]

Am currently rereading my copy of How to Win Friends and Influence People.

Did you borrow cyber888's copy, since he wasn't using it?


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[LARS]

You are wrong! You have absolutely no clue and no idea whatsoever what you are talking about. The Fed is going to increase interest rates, not decrease it. You wanna bet ??

No, you are absolutely wrong about comparing Puerto Rico to Greece. Greece is a sovereign country. Puerto Rico is part of the United States. You are comparing apples to oranges. And you have no idea about the stark difference between the economic structure of Greece and Puerto Rico. Please! Foreign currency debt does not even affect Puerto Rico, as they use US dollars. It's very different for Greece as they were almost forced out of the Euro. Again, you don't know what you are saying when you make these comparisons.

And as another comment on this thread mention, the article never mentioned academics. Monetary policy are the domain of real world bankers. I've been in charge of monetary policy - NO Academics ... Real World Bankers and Professional Bankers who work for the central bank, YES!
You are very very wrong.

Glad to know that my successful decades on Wall Street as an Investment Banker with a bulge bracket firm left me totally clueless on the ways of Finance, Wall Street and the how the Federal Reserve work. So I will defer to you and no doubt your decades of relevant experience.

That by the way is how you politely call someone an idiot...


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[LARS]

Yet another well written piece on outer bounds of negative rates:

http://mishtalk.com/2016/03/13/how-...rates-go-is-there-a-limit-to-draghis-madness/


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[LARS]

I read the article. Why are you bashing academics? Didn't read one thing about policy being set by academics? That policy I'm sure was in fact instituted by those in the "real world". Just like "real world" bankers and brokers push lobbyists to change policy to favor them whether it's a bad policy that could bankrupt our entire nation. Academia has no power or play in monetary policy.


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The Federal Reserve is staffed by Ph.D.'s in Economics. Janet Yellen herself is an academic. Ben Bernanke was an Econ professor at Princeton before Greenspan brought him into the Fed.

Need more? An example. A recent study/paper by two staff economists at the St. Louis Fed addressed the fact that their inflation models predicted, based upon their inputs, that the price of oil would be negative a few years out (i.e. oil companies would pay you to use their oil). Instead of questioning their basic assumptions/model they launched into an esoteric discussion of why their model said what it said.


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[redduck]

Glad to know that my successful decades on Wall Street as an Investment Banker with a bulge bracket firm left me totally clueless on the ways of Finance, Wall Street and the how the Federal Reserve work. So I will defer to you and no doubt your decades of relevant experience.

That by the way is how you politely call someone an idiot...

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I had to look up "bulge bracket firm". I thought it might refer to something else:

From Wikipedia:

"The bulge bracket comprises the world's largest and most profitable multi-national investment banks[1] whose investment banking clients are usually large corporations, institutions, and governments...

The name comes from the way investment banks are listed on the "tombstone", or public notification of a financial transaction or deal. The bank responsible for control of allocation of securities to investors, known as the bookrunning manager is listed above the others and on the cover of the prospectus. The font size of the name of this bank, or banks if there are co-bookrunning managers, is larger and it may "bulge" out."

note: last sentence highlighted by "Bulge Bracket" redduck
all other highlights were done by Wikipedia

 

[LARS]

I had to look up "bulge bracket firm". I thought it might refer to something else:

From Wikipedia:

"The bulge bracket comprises the world's largest and most profitable multi-national investment banks[1] whose investment banking clients are usually large corporations, institutions, and governments...

The name comes from the way investment banks are listed on the "tombstone", or public notification of a financial transaction or deal. The bank responsible for control of allocation of securities to investors, known as the bookrunning manager is listed above the others and on the cover of the prospectus. The font size of the name of this bank, or banks if there are co-bookrunning managers, is larger and it may "bulge" out."

note: last sentence highlighted by "Bulge Bracket" redduck
all other highlights were done by Wikipedia

I wish. I could've had an equally lucrative career in the movies, which would've been more fun... ;-)


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[CaliforniaMan]

The Federal Reserve is staffed by Ph.D.'s in Economics. Janet Yellen herself is an academic. Ben Bernanke was an Econ professor at Princeton before Greenspan brought him into the Fed.

Need more? An example. A recent study/paper by two staff economists at the St. Louis Fed addressed the fact that their inflation models predicted, based upon their inputs, that the price of oil would be negative a few years out (i.e. oil companies would pay you to use their oil). Instead of questioning their basic assumptions/model they launched into an esoteric discussion of why their model said what it said.


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Isn't that the same thing?