Negative Interest Rates

Abstract

Following the financial crisis of 2007, central banks have been pouring trillions of dollars to the commercial banks, even though the recent economic conditions are not similar to the ones of 2007. Then, there was a serious shortage of liquidity, banks were at the risk of bankruptcy, and the domino effect was a real threat, as in the 1932 crisis. It appears central banks follow these policies because they are haunted by the memory of the 1932 crisis. In addition, some researchers claim that the real reason is the nature of central banks: In some countries (particularly the “Fed” in the US) central banks operate mostly for the interest of their shareholders, the major private banks. Their policies allow the commercial banks to benefit a great deal . Presumably, the intent of these policies is to benefit the whole economy by stimulating investment, and reducing the exchange rate of a country.The policy mentioned above has achieved goal to a minor degree, contrary to the dictums of the traditional economic theory. By contrast to economic theory, several commercial banks have stored surplus funds with their central banks, to the point that the last ones penalize them for their deposits. Similarly, because there is not enough demand of funds by the private sector, the commercial banks are also induced to penalize their depositors. Facing these penalties, commercial banks have responded to saving in “warehouses” (real, or electronic ones), and individual depositors by keeping their funds “under their mattress” (an expression equivalent to “warehouses”). This creates concerns about the cost of using warehouses, the major component of which is the cost of keeping them secure.In addition to the use of “warehouses”, the investment funds of the public tend to be drawn to risky investment projects in order to earn some return. Also, commercial banks (given that they can borrow at low rates from the central bank), may engage in speculative projects abroad. The purpose of this article is to evaluate the conditions that have led to this situation.