Today’s news that the European Central Bank (ECB) may lower
its Deposit Rate into negative territory struck us as Hooverian, basically
insane in the Post-Financial Apocalyptic Period. Readers will recall that deflationary
policies wrought upon our country’s economy by Herbert Hoover’s administration just
made the Great Depression worse until his successor, Franklin Delano Roosevelt,
turned that catastrophe around by doing the exact opposite thing – inflating business
activity back to health. We rushed to
the blogs to see if anyone could explain exactly WTF is going on with this one.
Apparently, the Deposit Rate is the interest rate the ECB pays
on funds deposited with it by the commercial banks you and I would have
accounts with if we lived on the Continent, which is growing increasingly
unlikely by the moment as our subscribers read this, we’re sure. Dropping the Deposit Rate below zero means
our banks would receive 1) no interest and 2) less money back than they put in.
With a negative 1% interest rate therefore, a commercial bank
making a 100 million Euro deposit at the ECB would receive 99 million Euros at
the annualized end of whatever time period they’re talking about.
The blogs say there is no historical precedent for this at the
central bank level. There, charging
rates less than zero has never been done by anybody anywhere at any time. The idea does have one thing going for it
anyway. The logic appears to be
unfettered by any known economic theory yet devised by man: taking money away
from banks will encourage them to remove their ECB deposits and make loans with
that freed-up money.
Assuming that European loan officers are not lending money
today because they’re worried about getting it back, credit practices we’re
familiar with would give bankers a fascinating choice: do we make bad loans to customers or bad
deposits to our central bank?
Does anyone else see a bank failure issue here, or is it just
us?
