The nearly always wrong Christine Lagarde is wrong once again.
Today she claims Negative Rates Have Helped Europe More Than They’ve Hurt.
The next head of the European Central Bank, Christine Lagarde, appears to be as much of a fan of negative interest rates as the current chief, Mario Draghi.
European banks have complained about the impact on profitability, but even there the current managing director of the International Monetary Fund defended the move.
“On the one hand, banks may decide to pass the negative deposit rate on to depositors, lowering the interest rates the latter get on their savings,” she wrote. “On the other hand, the same depositors are also consumers, workers, and borrowers. As such they benefit from stronger economic momentum, lower unemployment and lower borrowing costs. All things considered, in the absence of the unconventional monetary policy adopted by the ECB – including the introduction of negative interest rates – euro area citizens would be, overall, worse off.”
Negative Rates Actually Cut Lending
Research shows Negative Rates Actually Cut Lending.
Central banks’ negative interest rates were supposed to increase spending, stop deflation and stimulate the economy. They may have done the exact opposite.
According to research from the University of Bath, central banks charging commercial banks to hold excess cash reserves have actually decreased lending. That’s because the additional costs reduce banks’ profit margins, leading to a drop in loan growth.
“This is a good example of unintended consequences,” said Dr. Ru Xie of the university’s School of Management, one of the study’s authors. “Negative interest rate policy has backfired, particularly in an environment where banks are already struggling with profitability.”
Xie also said that sub-zero rates appear to have acted against other unconventional forms of central bank policy, such as quantitative easing, introduced in the wake of the great recession.
Five Banks With Negative Rates
Where’s the Evidence Negative Rates Help?
There is no evidence negative rates produce a stronger economy or lower unemployment.
There is evidence banks are hurt.
Look at Deutsche Bank, French banks or Italian banks.
Deutsche Bank
Deutsche Bank allegedly has 1.63 trillion in assets as of June 30, 2019. The market questions those assets and so do I.
Fed vs ECB
Whereas the Fed bailed out US banks by paying interest on excess reserves, the ECB charged banks interest on excess reserves draining bank profits.
Negative interest rates unquestionably hurt EU banks and there is no evidence of Lagarde’s proposed counter-benefits.
A European banking crisis awaits.
Mike “Mish” Shedlock
She is a big wheel, in and a part of the European system.
As I see it, the European system is dedicated to everyone’s (a socialist idea) prospering, workers at a better rate than bosses, whether it has been earned or not. And cradle to grave benefits, simply for being a person and a citizen.
She is one of many trying to keep the system afloat, and paying those promised benefits. Is it sustainable? From here it looks like it isn’t, but she and the rest of Europe are blind to its faults or can’t fix what they do see. NIRP is magical thinking, and no person with their head screwed on straight can think it will work as intended.
Negative interest rates expose the failed fiat system. Zirp Nirp are totally against human nature. What could possibly go wrong?
Modern banks are heavily-leveraged. Let’s say for the sake of argument one bank is leveraged 10:1. They must of course buy government bonds, because Europe, Let’s say they will lose 10 euro on a 1 year bond…
When they book that loss they now need to reduce lending by 100 euro to maintain their leverage ratio. They will need to continue doing so for each and every bond they buy. This is absolute death for commercial banks, highly deflationary, and suck growth right out of the economy.
And that’s just the banks. Consider pension funds, insurance companies etc and what these losses will do to them.
But you go Lagarde.
She’s f’ing insane….
From Bastiat, to this illiterate, incoherent idiot. The decline of France, of economics, and the rest of the West in a nutshell.
There is no systemic, economic “benefit” from “lower lending rates.” As there simply cannot be: The amount of real resources stays the same; both capital or labor. Hence, all mucking about with “lending rates” does, is redistribute who gets to control said resources. Artificially lowering rates, only serve to allow those too incompetent to employ resources productively enough to pay the meddle-free market rate, to now bid the resources away from those more competent than themselves. Which explains 100% of their popularity with the privileged, incompetent, vapid and unintelligent classes which by no controls darned near all wealth and power in the West. Including Lagarde.
Maybe the decline is baked into the… “democracy”. Just a thought.
…when I, come to think of it, Lagarde definitely got the right credentials(corruption among others) to become a Central Bankster …..This is getting better by the day!
Sadly it’s not a spectator sport.
Time on planet working, converted to money so some ass-hole can then decide it’s value without recourse to those who spent their limited time on the planet earning it.
Is it just me or are we really all becoming serfs to the new feudal masters?
Just imagine who they shear the sheep if the world goes cashless. The power will be boundless.
CENTRAL BANKSTERS …….the LORDS and MASTERS of the universe .. long live our sacred ‘democracies’ !
Plus a major destroyers of environment, and driver of climate change. How many jumbo homes wouldn’t be built, dream vacation taken, ships, airplanes, and airports built, had there been prudent monetary practices. Every “green” should want to abolish the central banks, only if they had a brain.
So, which bank is going to be the first to pass the negative deposit rate on to customers? That will be fun when that ball gets rolling!
OUTRAGEOUS, but it will give an extra boost to already insane asset bubbles…..the future looks great !
UBS
You are a bit behind the curve: this is already happening in Europe. You want to have money in the bank, you pay.
don t agree with you on that one….in the euro zone, banks don t charge you for having money …..not yet anyway….
Couple of thoughts.
Neg rates a surrogate for inflation. Can’t erode purchasing power by 2% p.a. ? Why not just confiscate instead = neg rates. Somewhere there is a calculation to show what neg rate needs to be to get to the necessary equivalent inflation. Ass-holes, all of them.
She’s French political elite. Ass-hole full of own self importance, all of them.
Wake-up everyone.
Enough said.
Negative interest is an artificial construct not found in nature. It’s analogue in high tech product development circles is known as Unobtanium.
Plugging Unobtanium, as a placeholder, into key technology requirement gaps can be quite useful for identifying R&D requirements.
Central bankers, at the behest of politicians, however, are becoming inured to plugging negative interest Unobtanium into their economic models.
This is analogous to Rome emptying it’s granaries during extended drought and measuring success by the average weight of Roman citizens.
Not surprising.
I commented a few days ago when Greenspan gave his blessing that it was the start of “paving the way” Operation for negative rates.
It does appear many Central Bankers value spenders more highly than savers, and since every borrowed Euro is someone else’s deposit, I can sort-of see how Lagarde arrives at her conclusion. I do not agree with her, though.
I think it is best for bankers to encourage the productive use of borrowed money by demanding positive real returns. Negative lending rates might boost spending initially, but they also allow borrowers to profit on projects with somewhat negative returns and negative productivity. It is not a good thing for a country’s economy when debt explodes higher while real productivity decreases to less than zero, Ms. Lagarde.
“every borrowed Euro is someone else’s deposit”
only fractionally
Having finished making a mess at the IMF ($57 loan turned gift to Argentina), on to the ECB!
Well the ECB is already in a mess, but old LaGarde is just the woman to ruin the Euro. I wish her well in such an endeavour.
She’s continues to climb up the establishment world order, proving that failure is no obstacle to advancement. Results don’t matter. Just good intentions.
What a crazy world we live in!
Just like every other unicorn company–why do you really need profitability..
Indeed it is a crazy world. What makes it even crazier, to me, is how few people actually seem to recognize it. Irrationality is king. Great time for a new “savior”.
The Peter Principle is an observation that the tendency in most organizational hierarchies, such as that of a corporation, is for every employee to rise in the hierarchy through promotion until they reach a level of respective incompetence.
Hey another side effect, intended though, is the utter and complete end to class mobility.