Negative interest rates: policy reaches a new low

Has Keynesian economics reached the final frontier of idiocy? I may live on the other side of the world, but this article in The Telegraph found its way to me. It is a story that makes me think that if Keynesian policy has not descended to the lowest of depths it has come incredibly close. What can one really make of this?

‘Savers should stop complaining about poor returns and start spending to help the economy, a senior Bank of England official warned today. . . .

‘Older households could afford to suffer because they had benefited from previous property price rises, Charles Bean, the deputy governor, suggested.

‘They should ‘not expect’ to live off interest, he added, admitting that low returns were part of a strategy.’

It is their ‘strategy’ to discourage saving! What complete fools they are.

If there is any ‘strategy’ more calculated to make economic conditions worse than they already are, a campaign to reduce private savings would be hard to beat. If you think like a Keynesian that an economy is driven by aggregate demand, then you must think that saving is a problem when the economy is in recession. And this is not just some academic non-entity teaching at the Hayseed-on-Wye Polytechnic but a Deputy Governor of the Bank of England with the full support of the Governor, Mervyn King!

And then having read this I came across another article, this time in the Mail Online, also about the views of another Deputy Governor of the Bank of England, where I found this.

‘Negative interest rates could become a reality in an “extraordinary” move by the Bank of England to kick-start the economy, one of its senior officials revealed yesterday.

‘Deputy governor Paul Tucker said a reduction of the base rate to below zero should be considered four years after it was cut to a record low of 0.5 per cent...

‘If the base rate did become negative, it would mean major banks would have to pay the Bank of England to hold their money. The idea is that this would encourage them to lend more to stimulate both business and house buying.’

I start with the assumption that both these views are so obviously wrong that merely putting them up on the page is enough. Everyone can immediately see why lowering interest rates to inhibit saving – even going so far as to contemplate introducing negative interest rates – cannot be anything other than harmful. But after three-quarters of a century of Keynesian economics dominating our texts we may well have reached the stage where virtually no one with a degree in mainstream economic theory any longer understands how an economy works. Really, how are we going to get out of the mess we are in if these are the best ideas those managing our economies have to offer?

Steven Kates is the author of Free Market Economics: An Introduction for the General Reader.

Without savers, and the small amount of interest paid to them, for bankers use of savers deposits, then banks are not banks anymore, and should relinqish the name of bank, and the very meaning of it!
To some extent we are already suffering from negative interest rates in the UK, especially when inflation is priced in. Instead of parking your money in a bank and watch it disappear it is better to invest it in things that will save money in future: Home insulation, fitting PV solar panels, buying a car that does 85 miles to the gallon buying woodland to fuel your stove, are just a few of the things that will generate growth and proved a rate of return greater than offered by the Banksters and their chums in government who actually TAX interest! I am rapidly running out of cunning stunts though! Any move by the B o E to "go Japanese" would however be disastrous (with our poor record of savings)
A couple of points. Firstly the Telegraph article you link to is from 2010. Secondly, what is so controversial about low interest rates discouraging saving? This is exactly how monetary policy works - a reduction in interest rates makes borrowing/spending more attractive and saving less attractive. I also fail to see what is Keynesian in the slightest about it. Would be grateful for some clarification.

A worrying aspect of these type of policies is their long-term effect on people's attitudes towards saving, i.e. the way they undermine a 'savings culture'. Time preferences are likely to rise as result, breeding various negative effects including greater dependence on state safety nets.

Discouraging savers is a new one on me, governments always cryed out for savers throughout the decades, no wonder the world is in deep, deep financial crisis, look how the bank prodigies have brought the world to it's knees, and it still is calling for people to spend, spend spend, money they dont have. Another wave of new world debt is waiting in the wings! Theres one sure way for growth, and that is to build, manufacture, and to produce real jobs, and not Q.E. and casino banking, as politicians and bankers rely on!
I disagree with this. It is perfectly possible that the natural interest rate is negative at the moment, either because of government supply-side restrictions, or because we are going through a period of relative technological stagnation.It might simply be that it will cost more to consume in the future than to consume now - there is no a priori reason to expect a positive interest rate. In either case, propping up a positive interest rate artificially (as the BoE does at the moment) merely disguises and distorts that feature of the economy, with the side-effect of benefiting banks that have nowhere else to put their money but at the BoE.
@Ben - you are correct that it is how monetary policy works and monetary policy (if it is to be operated by central banks) should try to bring savings, credit and investment into broad equilibrium (ignoring the overseas sector). However, the words used perpetuate the myth that the economy is just a set of aggregates and that more saving is bad and consumption good. What is important is that the price mechanism works effectively so that savings are turned into productive investment. Through the price mechanism via changes in market interest rates a reduction in consumption can (and should) be turned into a rise in investment - of itself it is not bad for the economy.
Ben - Low or negative interest rates are Keynesian insofar as they are based on the idea that the economy's lack of growth is due to too little consumption. The Keynesians claim that low "aggregate demand" is the problem. In fact, the problem our economy has is a lack of saving, which - if it were higher - would provide investment and rearrange the economy, creating growth and higher prosperity. The problem with "monetary policy" is that it should not exist. We do not have a "clothing policy" or an "operating systems policy". And, thank goodness, we do not have an incomes policy, setting wage and price controls. Interest rates should be set by markets and the Bank of England should be returned to the private sector, which is where it was before its post-war nationalisation.
Alex: I agree that Britain almost certainly has supply side issues but the immediate problem is demand. The quantity of money/nominal spending has declined when it should've been growing steadily and as I'm sure we all remember courtesy of Friedman & Schwarz, that's a bad thing. Negative interest rates would help us get back to much desired demand growth. The Bank of England's privatisation wouldn't end monetary policy, in fact, its nationalisation was merely a formality, nothing much changed in practice until the FSA came along. The reason we have monetary policy is because there are benefits that accrue from stable money growth which the market may not provide on its own. So why take chances? Steven: Banks' demand for cash balances has risen, causing a monetary contraction. Negative interest rates will reverse this trend. Savings would most likely benefit because of the gains to employment and the economic growth that would result from such policies.
Negative rates on bank reserves acts as a fixed tax on the banking system. The only way for the banking system as a whole to reduce its impact is to expand by lending more, increasing the ratio of (untaxed) 'bank money' to (taxed) 'base money'. Unlike conventional profit or transaction-based taxes, negative rates fall most heavily on the least active banks, those with the highest reserve ratios. Conventional taxes, since they discourage activity (lending), are passed from banks onto wider society in the shape of higher margins on loans and lower rates on deposits. Negative rates, on the other hand, cannot be passed on, since they force lending up - all of these additional loans will need funding, and so deposit-taking cannot be deterred by banks trashing rates to savers. Radical policy would replace conventional taxes on banks with a negative rate on reserves deposited at the central bank. http://wealthoflabour.wordpress.com

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