Negative interest rates idea floated by Bank's Paul Tucker

[Victor]

How does that work? They'll pay you to take out a loan? Isn't that insane? What do they expect to achieve?

http://www.bbc.co.uk/news/business-21589128

 

Bank of England deputy governor Paul Tucker has said negative interest rates should be considered.

A negative interest rate would mean the central bank charges
banks to hold their money and could encourage them to lend out more of
their funds.

Speaking to MPs on the Treasury Committee, Mr Tucker said:
"This would be an extraordinary thing to do and it needs to be thought
through carefully."

He said it was one of a number of ideas that he had put up for consideration.

"I hope we will think about whether there are constraints to setting negative interest rates," Mr Tucker told MPs.

[TruthahnDerRuin]

I think it has something to do with fractional reserve banking. If I deposit $1 in the bank of england paying interest and can then legally lend $10 that earn interest, I can come out ahead.

[Arius]

Negative interest rates are achieved by adding a non-inflationary positive devaluation on all cash holdings.  Basically, if I leave my money in the bank, it will slowly decrease in quantity.  Loans will always be issued at a rate higher than the devaluation rate.  However, as the devaluation rate increases, the interest rate on new loans should decrease.

The objective of this madness is to push all holdings and liquid reserves out into the economy (as demand).  Essentially, convert from a mix of consumption and saving to a 100% consumption economy.  It's the ultimate Keynesian concept; punish anyone who tries to save.  Of course, the national savings rate will drop to near zero and all investment capital will move to commodities or equities.  Business will experience a boom while poverty skyrockets.  Exactly what you'd expect.

[Existing Alternatives]

 

Negative yields aren’t that unusual. A number of government issues currently show negative yields (future returns / current price). Most of the time these are tiny short lasting dips, but there is no real reason why they should not last. Some of these examples include US, Germany and Netherlands.

 In addition to what Arius said, there is also a matter of (perceived) safety of certain governments. It demonstrates investors’ willingness to pay significant safety premiums. Especially now with all that’s going on in Europe many money managers flee Spanish, Italian and even French government issues (while driving their prices down and yields up). Some of them have mandates that limit their options to European government issues, hence the flight to safety of German bonds, for example.

In these situations Treasuries have very little leverage and usually don’t deviate from markets by much.

[Existing Alternatives]

Btw, these are not the rates that YOU will be charged. These are the rates that GOVERNMENTS pay on THEIR loans. Since governments are by far the largest borrowers, this will create a trickle-down effect and *may* result in lower rates for consumers.