Negative Interest Rates Driving Banks to Crazy ExtremesWill Granderson
Imagine big banks and national central banks are two kids in the back seat of your car. Now imagine how you’d react if they wouldn’t stop fighting.
“He’s charging me for holding cash,” one would whine. “He’s not lending out the money I give him!” complains the other. Even the most responsible and patient parent would be sorely tempted to reach back and slap the stupid out of both of them.
The language may be hidden by more technical terms and the outward appearance by designer suits and tightly worded press releases, but that’s basically what’s going on between big banks and central banks. Furthermore, the bickering between the financial institutions propping up our economy isn’t limited to just the United States; it’s going on all over the world. The complaining and gamesmanship between financial institutions and regulators is now getting to the point that it’s becoming a potential hazard and it has to stop.
It Started With Good Intentions
As happens so many times when the institutions of government try to intervene in the economy, negative interest rates were implemented with the best of intentions. By suggesting that central banks could charge institutional investors a modest fee to store their money for them, they made the insanely crazy sound fairly reasonable. Even big banks do what you and I do with our extra cash; they keep it in the bank. Only if you’re Citi or Bank of America, that bank is the U.S. Federal Reserve. Central banks in Europe and Japan started charging large institutional investors for holding “too much” cash. The idea was that by charging them, it would prompt banks to lend out money for projects that would help grow the economy.
Swing and a Miss
For a while negative interest rates seemed to work. Banks started lending out more money, but to get the money out the door the banks had to lower lending standards. Then when banks started making these risky loans, bank regulators told them they had to carry more cash in case the loans went bad. But carrying more cash meant being charged negative interest rates! Institutional investors were, literally, damned if they did and damned if they didn’t.
Bad Theories Created Real Victims
What’s worse, some of those institutional investors holding large amounts of cash are pension funds and insurance pools. Those institutions were caught in the crossfire of a policy that really wasn’t aimed at them; they were just collateral damage. Many pension funds are mandated by charter to hold a certain amount of their wealth in government deposits. Negative interest rates then started, in very real terms, to take money out of the pockets of retired teachers, police officers and firefighters.
Crazy Breeds Crazy
As we’ve pointed out numerous times on this blog, irrational policy breeds crazy responses. Banks and institutional investors have now started going to insane lengths to avoid keeping their cash in central banks. Some of those crazy tricks include literally storing bales of paper currency in their vaults. Another crazy response—one that’s hitting depositors square in the wallet—is that banks are now turning to fees on their depositors to cover the tab the central bank is charging them.
If this squabbling within the banking system goes on long enough, we’ll see a return of people stuffing the mattress with bills. But a mattress doesn’t protect you from inflation. A better strategy for small investors is to turn a fixed percentage of your wealth into high quality liquid hard assets like gold and silver coins. That’s a lot easier to store securely than bales of paper money and gold comes with the added bonus of providing a hedge against both inflation and currency devaluation.
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If the turmoil in the banking industry wasn’t poised to spill over onto the entire global economy it would be funny to watch. The push and shove between the banking industry and government is becoming almost comical. Unfortunately, their antics threaten your savings, the lives of those drawing a pension and all our futures. With so much on the line it’s hard to see anything funny about what’s going on.