Category Archives: markets

Negative Interest Rates?

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University of Michigan Professor of Economics and Research Professor of Survey Research Miles Kimball had an interesting remark the other day in The Wall Street Journal. The article itself was a discussion of the EU’s Central Bank use of negative interest rates on deposits, of national Central Bank use of negative interest rates on deposits, even of some commercial banks such use.

In the context of an additional discussion of whether the US Fed should go that route amid concerns about whether rates are already so low in the US that there’s nothing the Fed could do to influence a future recession (assuming it’s a good idea at all for the government to interfere intervene with the market), Kimball said this:

It’s wrong to say central banks have run out of ammunition. Negative rates can be on tap before the next recession. There’s no limit to how deep we can go.

In an environment of negative interest rates—where depositors are paying the banks to store their money—why would depositors put their money into a bank, or any other financial institution, come to that, as mere deposits? These deposits are the source of funds from which banks and other lenders draw in order to make loans. Where else will such institutions get the funds to lend? If the lenders lend even less than they are now, with interest rates near zero but positive, from where will the capital come to support business factory maintenance, production expansion, short-term payroll needs, supporting credit card borrowing by consumers?

Now magnify this by the fractional reserve requirement imposed on lending institutions: a bank must keep a certain per centage of its loans outstanding as cash held in the bank, whether directly or as deposits in the Fed.

Hmm….

Government Interference

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General Electric Co has pulled the plug on the agreed $3.3 billion sale of its appliance business to Sweden’s Electrolux AB, bowing to pressure from the US Justice Department which wanted to block the transaction on antitrust grounds.

DoJ’s sham beef was that the deal would likely—notice that: not definitely would—lead to

less competition, higher prices and fewer options for millions of Americans who buy major cooking appliances each year.

Let’s leave aside the fact that GE’s appliance business, like appliance businesses generally, is a low margin, slow growing enterprise and that these characteristics don’t lend themselves overmuch to monopolies or to declining competition. Indeed, competition must heat up even more for such enterprises to survive.

No, the important thing is that monopoly power, in and of itself, is not against the law, it does not violate antitrust law. Only the abuse of that power is illegal.

Might the sale have led to abuse? Sure. But that’s speculative. Under American law, speculation isn’t grounds for interference, only the actual commission of a law-breaking act can be sanctioned.

DoJ’s interference in this deal, this private enterprises’ voluntarily entered into exchange, to the point that it successfully blew up the pending agreement, is Big Government overreach. It’s prior restraint, and it stinks.

“Retail Investor”

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The Left’s new obfuscatory synonym for “dumb Americans.”

US securities regulators, under pressure to demonstrate they have a handle on potential risks in the asset-management industry, are about to crack down on the use of derivatives in certain funds sold to the public, worried that some products are too precarious for retail investors.

Because us dumb Americans are just too ignorant to make our own investment decisions. We need the Progressive Know Betters to tell us how we should make some investments, and to deny us access to other investments.

[U]nder pressure to demonstrate they have a handle on potential risks in the asset-management industry: this is actually the problem. The securities regulators, themselves, have no idea of the risks of derivatives. They showed this risk all through the Panic of 2008, and they’ve done nothing substantive to correct their failure.

If these regulators were serious about the precariousness of (some) derivatives, they’d require the chaining of them and the arithmetic underlying them to be made public so that all investors—institutional and dumb Americans retail alike—could make our own assessments. Without Big Government Know Better interference.

More Government Overreach

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This time, by the Federal Reserve Bank. As most of you already know, the Fed runs “stress tests” to determine whether financial institutions can survive an economic dislocation of the magnitude of the Panic of 2008. Among other things, if the institution fails the stress, the Fed dictates to the institution the dividends it will be allowed to pay until the conditions leading to the alleged failure are corrected.

That’s a serious overreach; it is a government entity presuming to intrude itself into a private enterprise decision, a decision that the free market is fully capable of sanctioning or accepting without Big Government involvement.

It’s worse than that, though. Fed Board of Governors member Daniel Tarullo has exposed the more massive overreach.

Even though we do not publicly release the models, we have put systems in place to ensure oversight and accountability[.]

The Fed uses non-peer reviewed, secret models to make its assessments. Because of that secretiveness, we have no way of assessing the adequacy of the Fed’s “oversight and accountability” of those models. We also have no way of assessing the accuracy—even the legitimacy—of those models.

Tarullo’s excuse?

…disclosing the models could give banks an opportunity to game them….

Because the financial institutions don’t already game the system. Like nobody ever games any system. No, of course we do. It’s what competition does. Gaming—free market competition—is innovation, prosperity production. And, yes, the instability of creative destruction, which leads to breakout innovation and prosperity production.

It’s a disingenuous excuse for a disingenuous practice. The deliberate lack of transparency of this arm of the Big Government is of a piece with the general secretiveness of this Big Government.

It’s necessary secretiveness, however. If the public knew more about these models, knew something of how they work (or fail to work), we might do more than force corrections to them. We might do away with the Fed’s interference in private business decisions altogether, and that would reduce the power of the men in Big Government.

National Sovereignty

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There’s sovereignty, and there’s sovereignty. Michael Graetz, in Thursday’s Wall Street Journal, talked about the European Union’s extra-legal tax crime creation and its retroactive application of its newly minted crime to a number of multinational corporations. Interestingly, the “felonious” multinationals are American, so far.

These companies’ offenses? Tax agreements they entered into with the governments of Luxembourg and the Netherlands (and with Ireland…).

Graetz went into considerable detail about the nature of the so-called crimes in his piece. What’s interesting to me, though, is that these agreements were entered into in good faith on both sides: the multinationals on the one side and supposedly sovereign nations’ governments on the other side. However, the European Commission says it’s sovereign over these nations, and their solemn agreements cannot be allowed to stand.

This is the price of doing business—or trying to do business in good faith—with a fundamentally socialist polity—even if that polity has not the sovereign superiority it purports to arrogate to itself. On the other hand, this is the damage done by erstwhile sovereign nations surrendering even a part of their sovereignty to a supra-national construct.