( – promoted by buhdydharma )
So why shouldn’t the Fed just keep cutting interest rates? Why not lower the target interest rate to, say, negative 3 percent?
So suggests Harvard Professor N. Gregory Mankiw in the New York Times.
So, let’s pay people to borrow money? At a time when household debt is about one whole year of GDP, individuals should borrow more?
If that’s not weird enough, Professor Mankiw goes on to note that no one will lend at negative interest rates. Unless…
At one of my recent Harvard seminars, a graduate student proposed a clever scheme to do exactly that. (I will let the student remain anonymous. In case he ever wants to pursue a career as a central banker, having his name associated with this idea probably won’t help.)
Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.
GENIUS! Let’s force banks to lend (and people to spend!!) by making their money worth less in the future. Heh! Dogs and cats living together!
Can this be a serious idea? If you review the statements of the Bush administration, pretty much any absurdity can be found to have serious adherents. And, Mankiw is a Harvard Professor.
In some sense, this policy is like inflation, a condition in which money’s value decreases. However, the way in which inflation makes money worth less by increasing the supply of it, not decreasing it!
Mankiw attempts to claim this approach is Keynesian economics:
The idea of making money earn a negative return is not entirely new. In the late 19th century, the German economist Silvio Gesell argued for a tax on holding money. He was concerned that during times of financial stress, people hoard money rather than lend it. John Maynard Keynes approvingly cited the idea of a carrying tax on money. With banks now holding substantial excess reserves, Gesell’s concern about cash hoarding suddenly seems very modern.
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if Professor Mankiw has his way.
…”The Market Ticker, says, “Economics ‘Professor’ Advocates Theft”…and has this to say about Gregory Mankiw’s ‘scheme’:
Americans have tolerated a silent form of this theft for a long time, born out of the intentional provision of excess liquidity to prevent the incompetent and even fraudulent lending and borrowing by both private interests and government from having to be faced.
This has resulted in the mathematical laws of exponents running far further than it ever should have – a path that began in earnest after the 1987 market crash and has continued ever since.
Call it a conspiracy if you want, call it bad judgment, call it criminal fraud and looting. But so far, this form of theft and deception has been hidden under the guise of alleged “prosperity” – even though it was in fact nothing more than leverage laid upon leverage, debt laid upon debt.
You can read the whole article at the April 20, 11:03 post
I saw that in the Times & didn’t read it. Anything that any Bushie has to offer is clearly the opposite of what should be done in any given situation.