(my photo, available under cc license)
Way back on August 27, 2009 the FT reported:
“Bankers Watch as Sweden Goes Negative”.
At issue was Sweden’s embrace of unorthodox monetary policy, specifically their decision to cut the interest rate paid on bank reserves below zero. In other words, they were charging a penalty. In the USA, by contrast, the Federal Reserve actually raised the interest rate paid on reserves.
Yesterday, the FT reported:
“Sweden records fastest quarterly growth”
That’s the fastest growth Sweden has ever recorded. Ever. They’ve already tightened monetary policy from where it was in the depths of the crisis and, naturally, are poised to do some additional tightening. So are bankers actually watching this? It seems to me they’re not. When Sweden did something unorthodox, people said the world’s central bankers were going to watch. It worked. It worked really really well.
But is anyone paying attention? Here in the United States, inflation continues to be well below the trend level, we have tons of idle workers, and yet all you ever hear about is the possible need for tightening. Why not at least cut the interest on reserves back to zero?
I think the idea is that dropping the rate on reserves would disrupt many markets in a way takes a while to repair. For instance, liquidity would disappear from the Fed Funds market, since there’s not much reason for banks to borrow reserves from each other overnight when the cost of holding reserves itself is 0%. Retail banks would stop seeking new deposits. We might see other, less predictable effects.
From what I can see, the Fed is maintaining strictly positive IOR because it is worried about the possibly irreparable declines in financial intermediation from lowering the policy rate to 0. Like you say, this decision comes at a cost: policy is tighter than it needs to be. I’m not sure whether the Fed’s judgment is right or not, but I will note that as a small open economy, Sweden has more incremental gain from loose monetary policy and thus a somewhat different risk/return tradeoff on this issue.
This was overhyped at the time by journalists who didn’t know what they were talking about.
Sweden did not drop any significant interest rate below zero. They have raised rates several times since they got themselves in a situation where they were paying negative interest rates.
http://economix.blogs.nytimes.com/2009/10/01/negative-interest-rates-in-sweden/
The reason no one is talking about this is that it isn’t relevant.
That said, the Riksbank’s policies were aggressive, and the results were good! Proponents of more aggressive CB policy would do well to get the real facts on what happened.
I’ve posted a rundown on my blog with links to articles about the policy and a PDF of the Riksbank’s own report on their monetary policy during this period. It pays to ge the facts; find them here:
http://vanishingdollar.blogspot.com/2011/03/sweden-and-negative-interest-rates.html
This is about interest on bank reserves and is not related to the ‘monetary policies’ MY is always going on about.
Here the Fed is paying a high rate on bank reserves because the banks are in horrendous shape and this is a direct subsidy to them and Lord knows they need it. The Fed also wants to banks to have large amounts of instant cash around the next time there is a panic too. The opportunities to lend safely are small in the US so they have to put their money someplace.
It would be oh so nice if the banks had low risk customers to lend to so they could make money but the dearth of those makes this policy necessary or at least desirable. The traditional ultra short term credit markets like the commercial paper market have atrophied and T bill are paying almost nothing.
Let’s not forget too that the word ‘excess’ before reserves is a term of art in todays banking world.
“but I will note that as a small open economy, Sweden has more incremental gain from loose monetary policy and thus a somewhat different risk/return tradeoff on this issue”
Shouldn’t it be just the opposite? It is easier for Swedish banks to find investments outside of Sweden than it is for US banks to find investment outside of the US. It seems to me that a small economy would benefit much less from this policy than a large one.
The monetary magic dust post with advanced twitter warning has arrived .
Imagine what Sweden could have done if they had added some deficit spending magic dust to the mix. With a sufficient 20% defict, Sweden might have grown even 10%!
Sigh. Inflation, as measured by the Fed and elite backers of the administration, might be low. In the real world where people buy food and energy, prices are jumping up. And since energy prices are spiking, the prices for everything else will be going up as well.
“But wages aren’t rising in a spiral”, you say, so it’s not inflation. No, it’s worse – it’s a return to 70′s stagflation, where wages stay flat, and prices go up. Pretty much the worst of all possible worlds, and the idiotic energy policies of the government are making things worse.
What’s changed over time is that the US market is not isolated – so wage competition with the rest of the world remains even as prices go up. I’m not in favor of closed markets, but I’m also not clueless enough to assert that there’s no inflation that impacts people.
So you’re admitting that bank lending does more for stimulating an economy, than “stimulus”? Finally. How smart do you have to be to understand that a pitiful multiplier like Zandi’s 1.5 is nothing, compared to a bank loan multiplier of 10 ? Duh.
“How smart do you have to be to understand that a pitiful multiplier like Zandi’s 1.5 is nothing, compared to a bank loan multiplier of 10 ? Duh.”
Duh indeed.
From the article:
Domestic consumption has also recovered strongly, helped by robust public finances which have allowed Sweden to avoid the fiscal austerity measures holding back growth in other parts of Europe.
Yglesias is right. Unemployment is being kept at high levels because people are supposedly afraid of “inflation.” It’s politics.
Conservatives don’t like to look at international comparisons and study cases b/c it always proves them wrong.
Bernanke has done a lot but is still failing.
I’ve read on a couple other blogs among the well-educated (read: lawyers) that they think inflation is rampant and the measures used by the Fed are deceiving us. They point to food and fuel. Which is exactly why core inflation measures ignore it. Commodity prices are volatile. I didn’t hear them complaining about catastrophic deflation in 2008.
As an aside, lawyers are my least favorite group to talk to. They’re smart and clever, no doubt. But they confuse this for knowledge too often and they oversell their position. It makes them look foolish when they make simple mistakes.
The money multiplier and the Keynesian multiplier are very different things. One is how much total increase in GDP you get from a certain amount of debt-funded spending. The other is how much total increase in the money supply you get from an increase in the monetary base. It’s apples and oranges to compare one to the other.
Also, Matt has been calling for expansionary monetary policy for a long time now.
Yes our (sweden’s) last quarter (and full 2010) was great for GDP, but we had a real bad -5% GDP drop in 2009 so this isn’t all that good. It took until now for GDP to get back to 2007 level.
I don’t doubt that this trait is common among lawyers, but it certainly isn’t confined to them.
Unemployment is being kept at high levels because people are supposedly afraid of “inflation.”
Yeah, no doubt true as far as it goes. But I believe unemployment is being kept at high levels because people of influence actually prefer a system in which those who have jobs have no bargaining power whatsoever, and have to grovel each day in order to keep those jobs. They prefer a system with a large pool of needy, unemployed labor, in which the only response one has to seeing one’s benefits cut and one’s wages stagnate or fall is to say, “Thank you for at least not firing me.”
They prefer a system in which the US achieves greater “competitiveness” and wins more earnings for the owners and chief salaried beneficiaries of corporate commerce by driving down the standard of living of most working Americans. They believe everyone below them is a greedy, overfed and profligate serf, and that so long as there are working Americans who enjoy a greater standard of living than their Chinese counterparts, the system has not yet achieved the new desired equilibrium.
Paying a small interest rate on reserves has no meaningful effect on the volume of bank lending. If they wanted to lend at risk instead of holding reserves, they would still get a much higher interest rate by doing so. They just don’t want to do that, and instead want to build excess reserves. In other words, when the implied yield on reserves is higher than the target federal funds rate anyway, paying interest on reserves doesn’t change banking behavior. There is some tiny marginal effect you might get from being able to set the target federal funds rate at a flat zero instead of something just above that, but that really wouldn’t be a meaningful effect in light of what we know the ideal target rate would be (which is way less than zero).
Paying interest on reserves does have some use in terms of implementing the Fed’s other policies. That is really all that is going on.
I see this view put forward a lot and I just think it’s wrong. Most wealthy people (like most other people) don’t have the first idea how the finance system actually works.
Yes, it’s true that as long as their interests are protected, they aren’t going to support big policy changes. They definitely aren’t going to support policies specifically pitched as redistributive from them to others.
But there’s just no evidence that anybody prefers a high unemployment equilibrium for its own sake. Lots of people wrongly think it’s necessary in some way, but very few people are out there saying “good, the working class is losing power, now we will crush them in one swift stroke!!!!”
The nice thing about my POV, right or wrong, is that it can be addressed by propagating good ideas. If there really is a big conspiracy of rich people who just hate workers, you really can’t do anything about that.
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