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Speaker 1: and may not be appropriate for all industrial Hi am,

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Speaker 1: welcome back to Bloomberg Benchmark, a podcast about the global economy.

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Speaker 1: It is Thursday, February eighteen. I'm Tory Stiwell and economics

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Speaker 1: reporter with Bloomberg News in DC, and I'm joined by

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Speaker 1: my co Hostito, the acting Tokyo Bureauci and Dan Moss

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Speaker 1: are executive editor for International Economics News in New York. Killo, everyone.

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Speaker 1: So today we are going to talk about a concept

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Speaker 1: that has been an almost inescapable topic in financial news,

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Speaker 1: and that is negative interest rate policies a k A

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Speaker 1: and n r P a k A nerp AK interest

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Speaker 1: rates below zero I prefer nerve out of all of those.

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Speaker 1: I think it has a nice ring to it. We've

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Speaker 1: gone from zup to ner to tarp their nerve, all

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Speaker 1: the acronyms that we love. Basically, it's a policy tool

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Speaker 1: that until a couple of years ago, was extremely UNORTHODOXUS.

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Speaker 1: Now it's still unorthodox, book becoming less so because some

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Speaker 1: central banks are using it now to stimulate their economies

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Speaker 1: because they're more or less out of other tools to

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Speaker 1: support their economies using more traditional methods. So on January

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Speaker 1: twenty nine, the Bank of Japan joined a couple of

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Speaker 1: these other central banks in deploying a negative interest rate.

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Speaker 1: So it is now part of Tory's favorite NERT club,

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Speaker 1: along with the central banks of the year Zone, Sweden, Denmark,

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Speaker 1: and Switzerland. And the policy in Japan just went into

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Speaker 1: effect this week, so that makes it the perfect time

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Speaker 1: of act about it. Yeah, and I also get the

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Speaker 1: sense achy that it was a tipping point in terms

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Speaker 1: of the popular narrative of negative interest rates until the

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Speaker 1: bo J decision, there was a feeling that it was

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Speaker 1: a thing that the Scandinavian countries did and that the

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Speaker 1: e c B did, but that they were real outlies

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Speaker 1: and while you and our team in Tokyo were prepared

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Speaker 1: for a surprise from the Bank of Japan, it sure

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Speaker 1: wasn't this one. What it's done is it's taken the

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Speaker 1: negative interest rate question away from like, oh, we've got

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Speaker 1: five questions for Janet Yellen, let's add that one too,

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Speaker 1: pretty much the first thing FED officials are asked about.

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Speaker 1: And when Bill Dudley confronted this issue the other day,

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Speaker 1: he seemed a bit frustrated to be const stantly hearing it.

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Speaker 1: And you know, people in Congress have picked up on

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Speaker 1: this idea, and Chay Yellen was peppered with questions about

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Speaker 1: this last week. I just really get the sense that

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Speaker 1: psychologically Japan changed the game on this. That's right. But

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Speaker 1: before we get too far, we're going to start out

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Speaker 1: with a basic discussion of what negative interest rates even

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Speaker 1: are and how exactly they work. And for that we

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Speaker 1: are welcoming Karen Sho Patrow, who's here in d C

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Speaker 1: with me. Karen is co founder of Federal Financial Analytics.

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Speaker 1: Her firm advises financial services firms on political and regulatory risk,

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Speaker 1: and negative interest rates certainly could fall into that category. Karen, welcome,

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Speaker 1: Thanks very much. Story so let's start with just a

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Speaker 1: very basic definition and explanation of what negative interest rates are,

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Speaker 1: because it is a pretty topsy turvy concept to think about,

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Speaker 1: just like how we deposit our extra cash in a

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Speaker 1: bank and the bank pays us interests. Banks themselves have

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Speaker 1: their own bank to park their excess money, which is

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Speaker 1: the central bank or the Federal Reserve for us, and

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Speaker 1: policymakers can move the interest rate they pay up or

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Speaker 1: down right, hockey right, And so we don't confuse everyone.

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Speaker 1: These are a lot of different kinds of interest rates.

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Speaker 1: This isn't the same interest rate as the benchmark interest

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Speaker 1: rate that we talked about in one of our previous

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Speaker 1: episodes on the set. So if you recall that bank

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Speaker 1: park interest rate is the rate that bangs borrows from

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Speaker 1: each other overnight. This interest rate that we're talking about today,

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Speaker 1: which is sometimes called the deposit rate, sometimes called the

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Speaker 1: interest on excess reserves, is the rate that central banks

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Speaker 1: pay commercial banks to keep cash parked at the central bank. Yes,

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Speaker 1: and a negative interest rate here means that a commercial

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Speaker 1: bank actually pays the central bank a fee to deposit

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Speaker 1: money there. They're being punished for keeping too much money

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Speaker 1: sitting idle. Instead of lending it out or doing something

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Speaker 1: else useful with it. But you know, totally by making

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Speaker 1: depositors pay money. That's right. So, Karen, why would a

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Speaker 1: central bank want to do something so strange like this?

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Speaker 1: What's the goal? What are the theoretical pros and cons

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Speaker 1: of this policy? Well, I think, as Aki said, it's

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Speaker 1: a very um crazy, topsy turvy idea to force banks,

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Speaker 1: and if that happens to banks, sooner or later, it

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Speaker 1: happens to all of us as depositors to pay our

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Speaker 1: banks to take our money. And the only reason the

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Speaker 1: central banks in other countries, including Japan, went below what's

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Speaker 1: called zero lower bound was because they really couldn't think

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Speaker 1: of anything else to do in hopes of stimulating economic growth.

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Speaker 1: One of the most surprising effects of the crisis, combined

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Speaker 1: with all of the really, really difficult economic circumstances we've had,

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Speaker 1: is that central bank monetary policy tools are increasingly blunt.

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Speaker 1: All the things they know how to do didn't work well.

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Speaker 1: And now central banks have thrown trillions of dollars in

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Speaker 1: what's called quantitative easing. They bought trillions of dollars. I

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Speaker 1: read the other day twenty three trillion dollars of assets.

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Speaker 1: Global assets are now housed in central banks, and that's

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Speaker 1: an amazing number. And even that's not enough. So this

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Speaker 1: is sort of like you know the picturing the DC

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Speaker 1: Metro here, and we have the boxes in the cars

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Speaker 1: where you have like the glass and you pull down

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Speaker 1: a lever in case there's like a giant emergency. That's

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Speaker 1: what nerve is for central banks, so much less cateachorismic,

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Speaker 1: and I call it a hail Mary pass, but in

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Speaker 1: a way having circumstances driven them to a hail Mary pass.

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Speaker 1: One consistent feature of the post two thousand a night

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Speaker 1: landscape has been the complete absence of inflation. Many people

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Speaker 1: said that all this quantitative easing would produce loads of inflation.

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Speaker 1: In fact, the opposite is happening. So shouldn't the central

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Speaker 1: banks keep swinging even though they cut rights to zero?

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Speaker 1: I think one of the things we need to think

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Speaker 1: through and we don't know the answer to yet. But um,

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Speaker 1: I'm doing a lot of work on this actually right now,

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Speaker 1: because I think the swinging that that could keep swinging.

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Speaker 1: The other central banks could keep swinging. But finance has

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Speaker 1: changed a huge amount in the wake of the crisis,

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Speaker 1: and every one of the central banks we've talked about

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Speaker 1: traditionally executes monetary policy principally through banks, and banks are

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Speaker 1: very different institutions than they were from the crisis. There

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Speaker 1: are a lot better we hope they're better capitalized, but

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Speaker 1: they don't interact with the economy in the way they

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Speaker 1: used to US. Banks right now hold well over two

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Speaker 1: trillion dollars of excess reserves at the FED, and it's

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Speaker 1: largely because they don't know where else to put them.

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Speaker 1: So the goal of negative interest rates, then would be

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Speaker 1: to force banks to keep less cash on hand and

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Speaker 1: lend more of it out, you know, to consumers who

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Speaker 1: would spend it, or to companies who want to finance things,

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Speaker 1: build things by equipment, do whatever. Um. So, I guess

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Speaker 1: the goal is to just stimulate the economy more. That's

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Speaker 1: been paying banks a very low rate of return on

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Speaker 1: the excess reserves if it went negative, and this is

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Speaker 1: exactly why the Bank of Japan went negative. It's basically

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Speaker 1: kicking the kid out the front door and saying get

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Speaker 1: a job. Yeah. And let's also remember, you know, something

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Speaker 1: that thank Japan Governor Corona has been talking about is

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Speaker 1: that this is going to bring down borrowing costs um

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Speaker 1: for everything. Um, you know the ten year Japanese government bond,

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Speaker 1: you know those went in negative territory of US week

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Speaker 1: that we talked about a little bit um. So this

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Speaker 1: makes borrowing cheaper for everyone, for the companies, for consumers,

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Speaker 1: and the hope is this will for more people to

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Speaker 1: spend money. As contentious as it's been, Corona is not

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Speaker 1: exactly a babe in the woods easy key. Yes. But

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Speaker 1: then I think that's a great question. I think that's

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Speaker 1: something that we're all asking ourselves right now. This was

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Speaker 1: something that very very few people were expecting um before

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Speaker 1: the Bank of Japan actually announced the policy in January.

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Speaker 1: And you know, kind of the funny thing is when

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Speaker 1: the news first broke on the Bank of Japan, my mom,

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Speaker 1: who's Japanese and she lives in Tokyo, she texted me

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Speaker 1: and she was like, oh my gosh, this sounds like

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Speaker 1: a terrible thing. I hate it, and sent me these

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Speaker 1: angry and those, and after after the best settled, I

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Speaker 1: was explaining to her that this doesn't necessarily mean that

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Speaker 1: she herself is going to have to pay money to

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Speaker 1: keep money at her own bank. This, you know, is

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Speaker 1: something that applies to commercial banks keeping money at a

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Speaker 1: central bank. UM. But Karen, could you talk about how

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Speaker 1: this policy would theoretically impact consumers with my mom, that's

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Speaker 1: a great question right now. For the most part, in

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Speaker 1: Europe UM, where negative rates have been in place for

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Speaker 1: the longest amount of time, you've got a really difficult

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Speaker 1: dilemma because the banks are still paying their depositors really

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Speaker 1: tiny amounts of interest to keep funds in the bank.

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Speaker 1: But it's only because rates haven't gone super super low

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Speaker 1: and because they really fear that if depositors had to

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Speaker 1: actually pay the lost of the negative interest rates. The

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Speaker 1: banks are bearing depositors which just take their money and leave,

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Speaker 1: just keep it under their mattress, keep it under their mattress. Uh,

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Speaker 1: spend it, maybe the way the Fed wants, but perhaps

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Speaker 1: in sudden uncertain ways. There's been speculations some people might

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Speaker 1: put it into bitcoin. Uh, money market funds. I mean,

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Speaker 1: there are a lot of places in markets to put money.

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Speaker 1: And that's especially true in the United States, where we

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Speaker 1: have a very active non bank equivalent of deposits like

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Speaker 1: money market mutual funds. So the banks are basically in

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Speaker 1: one way, frustrating central bank policy by still paying depositors

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Speaker 1: a little bit. But in another sense, they're desperately trying

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Speaker 1: to cling to their fundamental purpose, which is taking deposits

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Speaker 1: and making loans. Right because if they if they begin

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Speaker 1: to charge this interest rate, people just won't deposit money

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Speaker 1: with them. Um. And I guess that brings us to

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Speaker 1: naturally to kind of the cons of negative interest rates.

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Speaker 1: What could go wrong here? What has been something or

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Speaker 1: what have been a few things that people have been

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Speaker 1: worried about with negative interest rate? And I think cash

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Speaker 1: hoarding is sort of one of the chief concerns here,

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Speaker 1: both on the part of consumers as well as a

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Speaker 1: commercial banks who obviously have a lot more cash to hoard. Uh,

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Speaker 1: it seems kind of dangerous if they just keep it

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Speaker 1: all in a vault. So where how does that even work?

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Speaker 1: A really big mattress. I do think what really worries

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Speaker 1: me the most about negative interest rates is how fundamentally

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Speaker 1: it changes the structure of economic growth, of taking deposits

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Speaker 1: and making loans, of financial intermediation. Do you really trend

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Speaker 1: that on its head? You now depositors pay bankers and

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Speaker 1: bankers pay borrowers, Well, how does that really work? After

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Speaker 1: just a few months maybe it's a short term shock,

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Speaker 1: but you're really fundamentally altering the role of banks, empowering

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Speaker 1: perhaps other forms of financial intermediation again, like mutual funds

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Speaker 1: buying lots of bonds. I don't know, nobody knows. That's

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Speaker 1: a great point. Well, now that we have a semi

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Speaker 1: form handle on what negative interest rates are, we can

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Speaker 1: head into the second part of the show, which is

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Speaker 1: all about the countries that are actually using them and

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Speaker 1: the results that they've gotten. After a word from our sponsor,

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Speaker 1: for all investors. So we should probably have at least

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Speaker 1: some discussion about what the outcomes have been on those

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Speaker 1: countries that have adopted negative interest rates. Now it's a

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Speaker 1: relatively recent phenomena given Karen, as you said, it essentially

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Speaker 1: upends the economic model. But are there any preliminary lessons

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Speaker 1: we can learn? And I guess we're really talking about

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Speaker 1: Scandinavia in the Eurozone here. I think the preliminary lessons

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Speaker 1: are mostly, in my mind, drawn from the Eurozone because Scandinavia,

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Speaker 1: for example, Sweden and are very unusual. In Sweden, for example,

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Speaker 1: almost nobody uses physical cash, so the impact of negative

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Speaker 1: rates on deposits is very different than it would be

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Speaker 1: in the United States or Japan or the Eurozone. And

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Speaker 1: the biggest takeaway I see so far, and why I

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Speaker 1: think negative rates are such a tremendous threat to financial

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Speaker 1: stability if they stay long enough and go deep enough,

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Speaker 1: is that it's having a combination of not really promoting

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Speaker 1: economic growth. The Eurozone is still bumping along the bottom,

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Speaker 1: and it's making banks weaker and weaker. They just cannot

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Speaker 1: keep paying for the cost of negative interest rates without

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Speaker 1: having places to put the money. Well, if it's such

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Speaker 1: a threat, then how did these decisions get made in

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Speaker 1: the first place. These are serious people, many have spent

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Speaker 1: a lifetime in economic policy making. How did this happen?

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Speaker 1: How did we get here? I honestly think it's because

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Speaker 1: central bankers think monetary policy, not financial stability. In most

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Speaker 1: central banks, those are on two very different tracks. We

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Speaker 1: learned the hard way in the crisis that if they're

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Speaker 1: on different tracks, you can have a head on collision.

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Speaker 1: But it's not in the gut of central bankers to

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Speaker 1: think about financial stability. They think about price stability, they

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Speaker 1: think about unemployment, and they're not really thinking through how

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Speaker 1: money moves through the economy. What do you do with

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Speaker 1: the payment system? Is Janet Yellen rightly said last week, Uh,

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Speaker 1: these are questions of Eurozone is just doing, you know,

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Speaker 1: playing um by the seat of its pants here? They

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Speaker 1: don't know. And this is despite the fact that many

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Speaker 1: of these central banks have taken on additional regulatory responsibilities

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Speaker 1: since the crisis. That's very true, Dan, but I think

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Speaker 1: it's new to them and it's not built into their culture.

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Speaker 1: And every one of these central bankers came of age

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Speaker 1: as a monetary policy expert and a central bank or

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Speaker 1: not as a bank regulator. That's the era when inflation

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Speaker 1: was the number one problem. That's correct. Acky, Are you

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Speaker 1: seeing any of the reverberations from the boj's decision to

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Speaker 1: explore negative interest rates. It's pretty early on and they

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Speaker 1: just rolled it out this week, But are you seeing

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Speaker 1: any impacts there yet? Sure? So? Um I guess the

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Speaker 1: biggest impact so far has been in the financial markets.

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Speaker 1: Um So, the entire GGB curb the Japanese government, by

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Speaker 1: the old curb that's come down. Uh, Like we talked

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Speaker 1: about earlier, there is now lightly negative yields on even

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Speaker 1: ten year Japanese government bonds, which is completely grandy to

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Speaker 1: borrow money for ten years and not have to pay

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Speaker 1: any interest. Yeah, it's it's not b R. Expecting a

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Speaker 1: drop in some mortgage rates, which should help for the

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Speaker 1: Japanese housing market. There are some signs that it was

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Speaker 1: flowing bound before the b OJ decisions. You know. The

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Speaker 1: interesting thing here is the foreign exchange market, because right

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Speaker 1: after the Leaguersjapan decision, the end weakened by a lot,

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Speaker 1: But then just a couple of days later, with all

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Speaker 1: this volatility and global markets, its strengthened way past where

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Speaker 1: it was before the b OJ decision, which gives you

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Speaker 1: kind of a sense of how powerless a central bank

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Speaker 1: can be in the space of such large market forces.

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Speaker 1: And you know, there's this really interesting local opinion poll

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Speaker 1: just a couple of days ago, conducted by one of

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Speaker 1: the local newspapers, and people were asked, will negative interest

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Speaker 1: rates for the Japanese economy? These are Japanese people who

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Speaker 1: are being asked, and I don't know, maybe Japanese consumers

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Speaker 1: are especially pessimistic, but the vast majority of them said no,

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Speaker 1: and only thirteen people said yes that it would be effective.

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Speaker 1: Really Palace, I mean, you've talked at about the negative

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Speaker 1: impact on Japanese bank stocks, for example. Is that aptance

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Speaker 1: or is it diminishing return? It's a great question. I'm

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Speaker 1: not sure. Like Karen was talking about earlier, banks have

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Speaker 1: already been in this environment of extremely low interest rates

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Speaker 1: for a very long time. So by you know, sending

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Speaker 1: that into negative territory, even just slightly, it's it's it's

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Speaker 1: unclear if that would do a whole lot. But like again,

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Speaker 1: this is you know, an extraordinary experiment. Um It's it's

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Speaker 1: exciting for us monetary policy journalists, because we haven't seen

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Speaker 1: a whole lot of examples in the past, and doing

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Speaker 1: this quick calculation, and with the b o J joining

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Speaker 1: the links of the prestigious Nerve Club UM, one quarter

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Speaker 1: of the global economy is now run by central banks

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Speaker 1: that have deployed interest rates. So it's really not the

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Speaker 1: fringe thing anymore the way it was in Denmark first

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Speaker 1: announced a couple of years ago. I think my question is, Karen,

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Speaker 1: do you think more banks are gonna follow? You talked

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Speaker 1: about the you know, extraordinary risks that come with this policy,

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Speaker 1: but it feels like it's becoming more mainstream. In terms

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Speaker 1: of the central banks. I think there are two things

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Speaker 1: that can happen. One is the central bank, like the FED,

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Speaker 1: picks negative interest rates, and the second is that they're

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Speaker 1: imposed on it by market forces and the policy issues.

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Speaker 1: I think in the United States, either one of those

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Speaker 1: courses has a very different impact, even then in Japan

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Speaker 1: because the dollar is the and Schmark currency and treasury

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Speaker 1: securities are the safe haven asset in the world. And

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Speaker 1: yet is it really such a disaster though, I mean,

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Speaker 1: you can walk down a street in Copenhagen, as I

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Speaker 1: did about nine months ago and not have any sense

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Speaker 1: of impending disaster and a key as you know better

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Speaker 1: than anyone, life goes on in Japan. Yeah, that was

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Speaker 1: my question too. Have we actually seen anything that catastrophic

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Speaker 1: happen from this very unchartered territory that where in has

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Speaker 1: anything gone wrong yet? At least not in Japan? But

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Speaker 1: you know, the policy went into effect on two days weeks,

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Speaker 1: so there's plenty of opportunity for bad things to happen.

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Speaker 1: I think, Karen, isn't the concern more kind of what

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Speaker 1: happens to the banking system in the long term when

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Speaker 1: you keep bit of interest rates around for such a

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Speaker 1: long time. That's one of the concerns. It's true, I

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Speaker 1: think I said before and then just bears repeating, we've

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Speaker 1: never done this before war. And how low you go

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Speaker 1: for how long you go in what type of an

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Speaker 1: economy I think is going to determine whether or not

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Speaker 1: it has good effects those desired by the central banks,

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Speaker 1: moderate effects, or really really dangerous ones. And how low

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Speaker 1: are we talking here when when we talk about negative

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Speaker 1: interest rates? What what do those look like in these

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Speaker 1: various countries. Most of the countries they're relatively modest and

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Speaker 1: minus twenty five or even fifty basis points. Sweeten justment

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Speaker 1: went much lower chalking the markets. UH. Switzerland has done this,

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Speaker 1: and some of the countries like Switzerland and Denmark are

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Speaker 1: also using negative rates, not so much for macroeconomic purposes,

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Speaker 1: but for exchange rates stabilization, and some of the analysis

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Speaker 1: we've been talking about applies a lot less to them

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Speaker 1: because they're doing it for a very different reason than

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Speaker 1: the Bank of Japan or the e c B. And

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Speaker 1: how low can we go here? I saw study the

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Speaker 1: other day that suggested that the United States could take

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Speaker 1: rates as low as a minus four point five. But

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Speaker 1: that's good, I couldn't finish it well. I think this

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Speaker 1: is a great opportunity to bring it back to the US.

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Speaker 1: And there is a lot of debate here right now

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Speaker 1: about whether or nerve is something that the FED should entertain,

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Speaker 1: even though it just initiated a tightening cycle here with

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Speaker 1: interest rates. Stocks have been tanking this year, and there's

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Speaker 1: a ton of speculation about recession risk, and people want

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Speaker 1: to know what the FED can do in case all

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Speaker 1: hell breaks loose in the U s economy. Essentially, and

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Speaker 1: let's be clear that FED still has room to maneuver

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Speaker 1: before it too has to seriously consider negative indust rates.

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Speaker 1: It could, you know, maybe do another round of quantitative easing.

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Speaker 1: It could cut its benchmark interest rate to where it

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Speaker 1: was before the December hike. But you know, Karen, if

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Speaker 1: if it comes to it, if things get really bad,

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Speaker 1: do you think that FED will seriously consider negative interest

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Speaker 1: rates too? And do you think they can even legally

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Speaker 1: do it, which was a question that came up last week.

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Speaker 1: We know they have seriously considered it because of the

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Speaker 1: paperwork that was released a couple of weeks ago showing

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Speaker 1: an extensive amount of analysis as well as legal thinking

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Speaker 1: about negative interest rate policy. We know there are folks

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Speaker 1: at the FED or around the FED, such as former

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Speaker 1: Chairman Bernankey, urging the FED to take this seriously. And

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Speaker 1: we know Chairman chair Yellen said last week that it's

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Speaker 1: a tool. Now. I think, Dan, you're absolutely right. Bill

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Speaker 1: Dudley doesn't want to pick it up. And I know

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Speaker 1: everyone I talked about the FED is very, very aware

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Speaker 1: of what a dramatic shock it would be to the

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Speaker 1: market if the FED were to go nurpe. But just

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Speaker 1: to sort of take a step back, Karen and help

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Speaker 1: us with an overall global document here. Many of the

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Speaker 1: central banks we've discussed either are inflation targeters or have

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Speaker 1: a version of inflation targeting, and typically that target is

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Speaker 1: give or take around two Now they're not close to that,

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Speaker 1: They're not remotely close to it. In some instances, it's

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Speaker 1: going the other way. I should they just do nothing?

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Speaker 1: Is that really a credible response to the ear of

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Speaker 1: disinflation slash deflation? Oh? I think nothing would be awful.

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Speaker 1: But um, they've got a choice of additional tools. Tories mentioned.

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Speaker 1: Some of them might certainly add into accommodate. A policy

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Speaker 1: in the United States would be politically controversial. Negative rates

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Speaker 1: would be too. There are changes that could be made

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Speaker 1: to the regulations, for example, and I know this is

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Speaker 1: politically controversial, but one of the reasons banks are sitting

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Speaker 1: on so many reserves right now is the new liquidity rules.

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Speaker 1: There are things the FED or the other are banking

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Speaker 1: central banks could do to freeze some of this money

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Speaker 1: up and try to get that financial intermediation flow working.

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Speaker 1: I think the fundamental problem the central banks are throwing

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Speaker 1: everything they've got trying to get inflation up and growth moving,

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Speaker 1: and the financial system is just not responding. And we

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Speaker 1: need to understand why that is, and I think fixed

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Speaker 1: for that. I mean, is there anything particular and special

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Speaker 1: to the US financial system that makes negative rates especially

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Speaker 1: dangerous or conversely particularly effective compared to elsewhere? Alright, think,

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Speaker 1: in the United States we have probably the biggest choice

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Speaker 1: of alternatives to negative rates in terms of deposits fleeing

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Speaker 1: the banking system. And you really could see a very

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Speaker 1: ironic condition in which liquidity rules that are forcing banks

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Speaker 1: to keep lots of and excess reserves create a liquidity

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Speaker 1: crisis as core deposits go flying out the door in

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Speaker 1: hopes of a positive returns. On that cheery note, well

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Speaker 1: this is uh. This has been a great primer on

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Speaker 1: negative interest rates. Karen, thank you so much for joining us,

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Speaker 1: and I guess we'll stay tuned to see what the

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Speaker 1: US ends up having to do over the next few

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Speaker 1: months and maybe even years. Thank you very much for

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Speaker 1: inviting me to join you, and thanks so as you

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Speaker 1: for listening to Bloomberg Benchmark. Will be back again next week.

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Speaker 1: Until then, you can find us on the Bloomberg terminal

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Speaker 1: and on Bloomberg dot com, as well as on iTunes,

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Speaker 1: Pocket cat Picture, and Google Play. While you're there, Please

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Speaker 1: take a minute to rate and review the show so

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Speaker 1: Daniel Moss d C, at Akso seven and at tour.

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Speaker 1: We still will see you next wing. This episode was

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