The Federal Reserve last week announced that it transferred $97.7 billion of its estimated 2015 net income to the US Treasury department, a new record. There are undoubtedly some people out there who see this as a great thing and wonder why we want to end the Federal Reserve System when the Fed gives the government so much money. You have to dig a little deeper and understand where that money is coming from to figure out what its effects are and why this is problematic.
The European Central Bank (ECB) made waves recently with its decision to lower interest rates on its deposit facility to -0.30%. That means that banks wanting to park their money at the ECB have to pay the ECB for that privilege. The supposed reason for introducing negative interest rates is to spur lending on the part of banks. Rather than being able to park their money at the ECB for free or for a small guaranteed return, the ECB wants banks to put that money to use by lending it. The idea of negative interest rates was once seen as impossible to achieve by many central bankers. But since the ECB’s decision last year to introduce negative interest rates, the concept has become increasingly accepted among central bankers, with even a few Federal Reserve officials supporting the idea of negative rates. But are negative interest rates really feasible?
Former Federal Reserve Chairman Ben Bernanke has a lot more free time on his hands now that he’s no longer in charge of messing around with the US economy. Since leaving the Fed, Bernanke has been a Distinguished Fellow in Residence at the Brookings Institution in Washington, DC. Yesterday, Bernanke began posting at his new blog on Brookings’ website. In his first post he engaged in a bit of wishful thinking, stating that “Now that I’m a civilian again, I can once more comment on economic and financial issues without my words being put under the microscope by Fed watchers.” His words may not be parsed anymore, but they certainly will be examined. It is Bernanke’s second post, on interest rates, that requires some attention. It’s a fascinating insight into Bernanke’s thinking and makes you realize just why the Fed’s monetary policy is so screwed up.
I love Scotch whisky as much as any kilt-wearing, haggis-eating, Robert Burns-reading Scotsman, but when I read about the huge price increases for rare Scotch, I can’t help but think that these insanely high prices ultimately have their root in loose monetary policy.
Alex Pollock of the American Enterprise Institute seems to have missed the point of the European Central Bank’s (ECB) introduction of negative interest rates at its deposit facility. Negative interest rates are like a 100% tax rate in many respects. If you set a 100% tax rate, people are just going to stop working. Not…
Every now and then a central bank publishes a research paper that inadvertently pulls back the curtain to reveal the insidious effects of monetary policy. A recent post by the German Bundesbank, published to defend central bankers from allegations of destroying savers, actually did just the opposite, demonstrating that central banks have over the past several decades actively hurt savers. In essence, their answer to criticisms that current monetary policy discourages saving is: “We’ve always engaged in policies to discourage saving.”