Yellen Will Go Negative If She Has To

February 12, 2016 at 9:06 am 2 comments

I don’t know whether to be more confident about the fate of mankind  or even more scared for my daughters this morning.

OK maybe that is a little melodramatic, but think about it. Yesterday, it was announced that more than a thousand scientists from around the world worked together and  were able to detect a gravitational shimmer in the fabric of the universe caused by the collision of two black holes more than a billion light years away.

In contrast, the limits of the dismal science euphemistically described as economics were  on display as Janet Yellen explained that the economic outlook is a lot more uncertain that it was just a little more than a month ago when the Fed raised interest rates for the first time in almost a decade.  What’s more, Yellen reported that the Fed has studied  the feasibility of implementing negative interest rates in the event the economy tanks.

Central banks are so desperate to spur banks to put more money in the economy that some have actually started charging banks that place their deposits with them.  The logic is that if banks have to choose between losing money and lending it out they will lend it out.  Japan has taken this approach as has the European Central bank, the Danes, the Swiss and, just this past week, the Swedes.

All very interesting, you’re thinking, but how does this impact me? Well, most importantly, if the economy does get so bad  that negative interest rates become a real policy consideration, it would be an absolute disaster for credit unions and community banks, for that matter.  As the Economist pointed out this past week, negative interest rates are particularly dangerous for mutual institutions.  First, they are more dependent on deposits to fuel their growth and are less likely to pass on the increased cost of storing their funds to consumers.  Furthermore, with mortgage rates unlikely to substantially rise any time soon, credit unions and banks would see a margin squeeze of potentially unprecedented proportions.

Now, I am not suggesting that anyone panic. Yellen made it quite clear that negative interest rates will probably never be introduced, but the mere fact that she was unwilling to take them  off the table shows how precarious the economy is right now.  It isn’t too early to start making it clear to the Fed in no uncertain terms that a policy so damaging to credit unions that it would put many of them into their own personal black hole should never be seriously considered.

Entry filed under: Economy, General. Tags: , .

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2 Comments Add your own

  • 1. Lynn Gray  |  February 12, 2016 at 9:23 am

    When oh when are we going to realize that the scientists who call themselves economists have no idea how to run an economy, they have all been taught at the same school of economics and obviously the professor/doctor of economics, read his class from the same book.

    If anyone else got their predictions so wrong in their fields they would have been fired long ago.

    Lets go back to the old days when they realized if you made the item in the country and people could afford to buy the item then its a win win.

    The analogy I like to use is we now make the washing machine in China, it costs the company a 10th of what it would to make it in the USA however we still pay the same price as if it were made in the USA. How does that help our economy?

    Reply
  • […] a recent blog I talked about the increasing willingness of central bankers to impose negative interest rates – […]

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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