Telegraph: Deutsche boss says negative interest rates are ‘fatal’

Deutsche Bank’s chief executive has warned of the “fatal consequences” of the European Central Bank’s negative interest rate policy, which he said punished savers and could even undermine the recovery.

While Mr Cryan praised the central bank for helping to revive the economy following the financial crisis, he said low rates had dire implications for savers and pension plans.

Mr Cryan said the policies also encouraged companies to “refrain from investments due to ongoing uncertainty”.

Bank Of England’s Working Paper #383: Non-linear Networked Contagion Risk

[Editor’s Note]  So where does the next financial crisis begin?  From a highly interdependent, non-linear, in-deconstructable network of claims, obligations, and obtuse financial transactions and instruments.  Good luck putting Humpty back together again.

from Working Paper #383 (Prasanna Gai and Sujit Kapadia):

In modern financial systems, an intricate web of claims and obligations links the balance sheets of a wide variety of intermediaries, such as banks and hedge funds, into a network structure. The advent of sophisticated financial products, such as credit default swaps and collateralised debt obligations, has heightened the complexity of these balance sheet connections still further. As demonstrated by the financial crisis, especially in relation to the failure of Lehman Brothers and the rescue of American International Group (AIG), these interdependencies have created an environment for feedback elements to generate amplied responses to shocks to the financial system. They have also made it difcult to assess the potential for contagion arising from the behaviour of nancial institutions under distress or from outright default.

Is Monetary Policy Dead or Just Killing the Global Financial System? The Black Hole of Central Banking Is Collapsing Under Its Own Weight


[Editor’s Note] As the natural rate of interest (whatever that might be) collapses it signals a triple witching hour for central bankers who credibility and efficacy have been undermined by their own lack of imagination and comprehension that borders on a pre-Copernican financial cosmology. resorting to an experiment in poorly understood negative interest rates and the vast nuclear arsenal of unintended consequences.  Screen Shot 2016-08-24 at 2.19.44 PMLack of attractive productive investment opportunities, systemic risk and volatility couple with coercing investors to change their natural risk profile are distorting asset prices, investment returns, the yield curve and credit spreads.  Could turn out fine or could make 2007 look like a walk in the park as  there are  no tools left in the monetarists’ toolkit. Fiscal policy takes weay too long to be effective so we might just be SOOL. Don’t be surprised if this doesn’t end well.


From Wall Street Journal

When central bankers gather this week in Jackson Hole, Wyo., they will be consumed not with some pressing crisis in the global economy but by an existential threat to their relevance.

The threat stems from the realization that the sluggish economic growth that has prevailed since 2009 may be here to stay. If so, then so are today’s low interest rates.

Central banks set interest rates to balance investment and savings and thus keep economies fully employed and inflation stable. The interest rate that achieves that balance is called the natural rate. The fact that inflation and growth are now so sluggish despite ultra-easy monetary policy shows that the natural rate has fallen—by 1 to 2.5 percentage points since 2007 in the U.S., Canada, Britain and the eurozone, according to arecent Fed study. Fed policy makers think the U.S. natural rate is 3%, down from 4.5% before the recession. That’s 1.5 percentage points less ammunition to counteract the next shock to the economy.

Say What?? Seller’s Paradise: Companies Build Bonds for Central Bank to Buy


The European Central Bank’s corporate-bond-buying program has stirred so much action in credit markets that some investment banks and companies are creating new debt especially for the central bank to buy.

In two instances, the ECB has bought bonds directly from European companies through so-called private placements, in which debt is sold to a tight circle of buyers without the formality of a wider auction.

It is a startling example of how banks and companies are quickly adapting to the extremes of monetary policy in what is an already unconventional age.

Bloomberg: Rogoff versus Posen Debate Negative Interest Rates

Debate: Stan Rogoff versus Adam Posen

TLTRO I & II: ECB desperation or just “non-standard monetary policy”?

Another Hail Mary from the European Central Bank.  This one’s pretty unbelievable:

ECB to Banks: You make a loan we will lend you 30% of the amount for 4 years at -.04% (give or take)


More to come on TLTROs


S&P Chief Economist: Negative Interest Rates Defy Normal Logic

Australian expat Paul Sheard, the chief global economist at S&P Global in New York, has a comical way of describing the negative interest rate experiments by central banks around the world.Screen Shot 2016-08-20 at 11.42.20 PM

“Negative interest rates is like an Alice in Wonderland concept,” he said.

“It seems to defy normal logic.”

The answer is not negative interest rates, which are failing in Europe and Japan because the policy has “completely bamboozled” people, he added.

Guardian: RBS to charge major financial institutions for holding their cash

Royal Bank of Scotland is to start charging major financial institutions for any cash it holds on their behalf for trading purposes, in the latest illustration of the impact of Mark Carney’s post-Brexit vote stimulus package.

It is the first time a bank has started to make charges for sterling deposits since the governor of the Bank of England announced on 4 August that interest rates would be cut from 0.5% to 0.25% to stave off any economic downturn following the vote to leave the EU. Carney said he was not a fan of negative rates.

Standard and Poor’s attacks negative interest rates as desperate and damaging

Central banks’ experiment with negative interest rates risks backfiring in spectacular fashion, top ratings agency Standard and Poor’s (S&P) has warned.

In a new report assessing the impact of sub-zero borrowing costs on economies and industries around the world, the ratings agency concluded: “Moving to a negative rate environment, in every circumstance that we’ve looked at, is a clear sign of desperation with the list of potential economic damage from these policies substantial.”

NIRP and The Zero Lower Bound Problem

Literature on the Zero Lower Bound

The possibility of such an impediment has been mentioned over the years by McCallum (2000) and possibly others.[1] In the recent past, Paul Krugman and Michael Woodford have provided their views about the topic. Paul Krugman stated at the beginning stages of the ZLBP in the US itself that the monetary policy won’t be able to resolve this situation, and unconventional methods will be necessary to tackle it.[2] Speaking on the topic, Michael Woodford remarked that in a zero lower bound, the ideal thing to be done is for the central bank to bridge the output gap by spending liberally on stimulating effects. [3]