Oyconomics: Will History Judge Negative Interest Rates in the Same Vein As Blood-letting?

Abe Maslow famously said, “when your only tool’s a hammer every problem starts looking like a nail.” Seems the Fed has figured out it needed a few more tools in the toolkit. But it’s not clear what job their new tools — interest on reserves and large-scale asset purchases — are good at fixing.

Screen Shot 2016-09-06 at 11.33.14 PM
A little bloodletting never hurt anyone? Never helped anyone either.

There are no right solutions to the wrong problem. Perhaps it might make sense to make sure we are solving the right problem. Said differently, perhaps the problem is that we are not sure what the problem is. That is depending on what your definition of “is” is. Oy Vay!

As  the lender of last resort, the Fed gets a lot of leeway in the midst of a global financial crisis.  But here we are eight years out and it looks like the Bail-out and its ad hoc solutions like TARP and quantitative easing etc. etc. might just have been kicking the can down the road.  The coercive nature of low (let alone negative) interest rates has the effect of getting investors, consumers, and savers to do things that they are not naturally inclined to do.  The wide disparity in opinions from “experts”, consumers, and investors about the wisdom of NIRP is unto itself terribly troubling.

Basically,it would appear the Fed has plum run out of ideas, at least good ones. Blood-letting was the medicine of choice for eons.  Maybe the Fed needs to find some better ideas.  Until then welcome to the world of Oyconomics.

Leave a Comment

Your email address will not be published. Required fields are marked *