The negative interest rates imposed by the Bank of Japan have begun to make their way into the Japanese banking system. Japanese trust banks have begun to impose negative interest rates on accounts held by institutional investors. It shouldn’t be surprising that Japanese banks are trying to pass on the costs imposed by the central bank’s policy of negative interest rates. It happened in Switzerland, it is happening in Japan, and it will happen in Europe. And as it becomes more widespread, investors will begun to withdraw their funds from the banking system.
The Swiss Consider a National Referendum on Fractional Reserve Banking
By Jeff Deist
You may have heard about the Swiss referendum to end fractional reserve lending by Swiss commercial banks. It’s a fascinating development, and another example of how average Swiss people can use the federal referendum process to force both the central legislature and the 26 cantons to consider citizen proposals– merely by gathering 100,000 signatures within 18 months.
This week marked the fifth anniversary of the passage of the Dodd-Frank Act. As Chicago Mayor Rahm Emmanuel famously said, never let a good crisis go to waste. Congress certainly didn’t let the financial crisis go to waste, using it as an opportunity to push all sorts of projects that had stagnated for years and lumping them into Dodd-Frank. Dodd-Frank may even go down in history as the largest bill ever, a record that will probably stand until the next financial crisis, when Congress will likely try to pass an even larger bill. And it’s precisely because of the mindset that created Dodd-Frank that there will be another, even larger, financial crisis. Financial crises are not caused by banks failing to adhere to regulation – they are caused by the symbiotic relationship between government and the banking sector that gives rise to those very regulations. Rather than making the banking sector safer and more resilient to crises, Dodd-Frank ossified an already shaky system, enabling the “too big to fail” banks to grow even larger and more prone to failure.
The photos from Greece showing long lines at ATMs are astonishing. Even after the deposit outflows from Greek banks over the past weeks, there are still large numbers of people who are trying to get their money out of the banking system. With the banks closed, ATMs are the only way for people to get any cash. Let’s not beat around the bush in describing what is happening: this is a bank run. Even though Greece has a deposit insurance scheme that covers up to €100,000 in savings accounts, trust in the banking sector is declining and people are trying to get their money out. Cash is the ultimate means by which consumers can restrain the behavior of governments and banks, which is why governments and banks are doing everything they can to do away with cash.
This article was originally published at the Ludwig von Mises Institute.
The Birth of a Monster
By David Howden
The Federal Reserve’s doors have been open for “business” for one hundred years. In explaining the creation of this money-making machine (pun intended — the Fed remits nearly $100 bn. in profits each year to Congress) most people fall into one of two camps.
Those inclined to view the Fed as a helpful institution, fostering financial stability in a world of error-prone capitalists, explain the creation of the Fed as a natural and healthy outgrowth of the troubled National Banking System. How helpful the Fed has been is questionable at best, and in a recent book edited by Joe Salerno and me — The Fed at One Hundred — various contributors outline many (though by no means all) of the Fed’s shortcomings over the past century.
Ever since the European Central Bank (ECB) decided to drop interest rates on its deposit facility into negative territory, there has been a lot of chatter about the consequences of those negative interest rates. A negative interest rate means that, when a depositor deposits money into an account, the depositor has to pay the bank for that deposit, rather than the bank paying the depositor as would be the case with positive interest rates. The ECB’s introduction of negative interest rates, first -0.10% and now -0.20%, was intended to keep banks from holding money at the ECB, and instead to lend that money to consumers and businesses in order to stimulate spending and economic recovery.
The perfect banking system, like the perfect monetary system, is one which serves the needs of consumers and savers, and not the needs of the government. It is a system in which entrants are free to enter and leave the market with a minimum of restrictions, and in which no banks are bailed out. Almost…