Ydstie expresses uneasiness about this policy's effect on banks.
"While some mortgage holders from Denmark to Spain might be quite happy about it, for the most part, the banks are not happy and are losing money as a result. If these negative rates became too widespread they could create serious problems."
The European Central Bank launched a bond-buying program in order to decrease interest rates and encourage borrowing, but so many bonds were bought that they became scarce, pushing interest rates below zero.
"Those government rates are often benchmarks for mortgages. So, for instance, let's say you had a variable rate mortgage in Spain. Maybe your interest rate started out at 2 percent, but now it's possible it's fallen to negative 1 percent, meaning the bank has to give you a rebate or maybe pay down a bit more of your principal each month."
Supporters of the policy think it's working "better than expected" allowing businesses to expand, and possibly hire employees. Consumers are also finding spending more attractive as their incentive to save decreases.
"Consumers are finding it doesn't pay much to save money by depositing it in the bank or putting it in a money fund, so they may be more inclined to spend it and help boost economic growth. In fact, today, the IMF upped its forecast for European growth this year to 1.5 percent. That's not great, but a lot better than Europe has been doing recently."
Is this sustainable for the banks? Is it a good idea to decrease the incentive to save to this extent while rewarding borrowing? Are negative rates necessary to get economic activity back on track?
Is this sustainable for the banks? Is it a good idea to decrease the incentive to save to this extent while rewarding borrowing? Are negative rates necessary to get economic activity back on track?
This is extremely interesting. I'll be honest, I didn't think negative interest rates and banks paying customers was a thing. I don't think that it is a sustainable practice, as it is completely counter-intuitive to the function of a bank. However, it seems to be doing a great job of stimulating the economy in so far as getting loans to open businesses which will increase employment and getting people to consume more. Maybe this kind of policy isn't all that bad for a very brief period of time, just long enough to pump some life into the economy.
ReplyDeleteLike Shelby said I didn't think that this was possible for banks to pay negative interest rates but I don't think it is a great idea. This is just falsely boosting the economy similar to what is going on in China. China is using an increase in investment to bolster consumption when it is really just a short-term fix, and now Europe is paying people to borrow money which incentivizes people who don't normally borrow or wouldn't be applicable to borrow to take money that they may or may not be able to pay back. It's good that they are increasing consumption, but I think it's going to be a challenge for these countries to make a soft-landing after they increase interest rates again.
ReplyDeleteI agree with Shelby also, I knew that negative interest rates and banks paying customers existed, but I didn't think of this as a method to stimulate an economy... how sustainable is such a method though over longer time periods?
ReplyDeleteIt seems like sustainability is a big problem with this situation. Negative interest rates may seem like a way to stimulate the economy for a short period of time, but I do not think this tool should be used for very long. I do not think negative rates are necessary though, there has to be other options, or at least keep the rates at zero; if rates were at zero, consumers wouldn't have an incentive to save, so they might be just as likely to spend their money. Also, this concept scares me because it reminds me of how the US ended up in the housing bubble. The incentive to borrow and spend was much great than that to save, so people who probably shouldn't have been borrowing or spending money were doing both, and if negative interest rates continue in Europe a bubble like the US experienced could be their fate.
ReplyDeleteI agree with Veronica, incentivizing people to borrow from banks and spend money they normally wouldn't spend makes me nervous. From everything we have learned so far it seems like this action almost always results in a creating a bubble. I feel like the EU is too focused on short term growth that they are becoming blinded of the potentially devastating longer term effects that low, or in this case negative interest rates can promote.
ReplyDeleteTo be truthful, I am not sure how I feel about this policy plan. I think that in the short run, there are benefits to this policy. However, I also think that the risks of such a policy plan cannot be ignored. Also, I think this policy plan can damage the European financial system, which is already fragile as well as cause a housing bubble.
ReplyDelete