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Why negative interest rates are a stupid idea

Phil Oakley explains why in his view the thinking behind negative rates is intellectually bankrupt.
Why negative interest rates are a stupid idea

In the UK, the Bank of England has been floating the idea of negative interest rates and asking banks what they think. My guess is that they will rightly say it is a very bad idea.

Negative interest rates turn the normal workings of banking on its head. Instead of receiving interest, depositors have to pay to keep their money in a bank. Borrowers will be paid to borrow instead of paying interest. If banks want to keep money on deposit at the Bank of England, they will have to pay to do so - instead of being paid.

Savers have no incentive to save with banks and will pull their money out, which may lead to a run on the banks. They may respond by saving more and depress economic activity in the process. Negative interest rates may even stoke asset price bubbles that have done more harm than good.

Europe has tried out negative interest rates for a while now and it has not done any good. It has not led to more lending and if the share prices of European banks are anything to go by, has kicked the living daylights out of the sector.

It’s a stupid idea and shows the intellectual bankruptcy of central bankers and academics who push it as a solution. I think we actually need higher interest rates to rebalance economies towards savings and production rather than debt-based consumption and over inflated asset prices but I’m not holding my breath.

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