Tucker mulls possibility of negative interest rates - The Share Centre Blog

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Michael Baxter

Tucker mulls possibility of negative interest rates

Written by: Michael Baxter on February 28th 2013

Category: Bull & Bear, News

Is he mad? Does Tucker think that he can, as if by magic, provide the answer to the Universe? That is the gist of the criticism aimed at Paul Tucker, deputy governor at the Bank of England, after he suggested to MP’s this week that interest rates may need to go negative for financial stability. But is there more to his idea than the critics would have you believe?
The barrage of criticism and the ‘Is he mad?’ comments were pretty vitriolic.  It may be worth pointing out, however, that Tucker said that the idea to which he was referring was: “Not something anyone should clutch onto as the answer to the universe.”

Mr Tucker appeared before the Commons Treasury Select Committee on Tuesday (26 February) and suggested that the Bank of England may eventually charge negative interest rates on some proportion of bank reserves held at the Bank of England.

To say his suggestion opened a can of worms is to be unfair to a can of worms. The media stomach seemed to be turned far more than if they had not merely opened but had in fact eaten a can of worms.

The problems with negative interest rates are pretty obvious. If you get a negative return on your money, would you leave it in the bank, or would you withdraw it and stick under a mattress? Setting aside the argument that real interest rates are already negative, and with bank charges customers are already paying to leave their money in their current account, the criticism may miss the point.

Mr Tucker’s ideas are thoughtful, and not at all simple.

Some say that negative interest rates cannot work, because there are technical reasons why such a move would have a catastrophic impact on the business model used by Building Societies.

But Tucker was not suggesting negative interest rates per se. He was merely suggesting that under certain circumstances banks may be charged to deposit some of their money with the Bank of England.

Tucker wants banks to lend to business, not sit on their cash. And by charging negative interest rates, under certain circumstances, it would be as if they were paying a fine.

Back in 1944, at Bretton Woods, Keynes proposed a mechanism by which countries with current account surpluses were encouraged to import more. The idea was for countries to deposit the money from their trade surplus with a kind of world central bank, and then pay a negative interest rate on the money. Had the Keynes plan been adopted, today’s economic crisis may never have occurred.

In all the criticism aimed at QE and monetary policy, one thing is overlooked. There is no God given right for savings to earn a rate of interest. It should only be profitable to save, if the savings are used to create wealth. You may argue that sitting on savings, regardless of their return is a prudent thing to do, but just bear in mind that savings that do nothing and just sit there, have the effect of sucking production out of the system.

See it in terms of Ugg and his community of hunter gatherers living 30,000 years ago. For Ugg there was no point in saving, except perhaps in storing food in the cave to get through the winter. But to fund his lifestyle when he was old and frail and unable to hunt, the best thing a younger Ugg could do would be to help promote a healthy tribe. Investment was useful if it led to an innovation such as an improved hunting technique, but saving for retirement was not helpful.

Today – thanks to the innovation we call money – from a micro point of view saving for retirement does make sense. But from a macro point of view, it is not saving we need but investment.

Savings should enjoy a return commensurate with the future wealth that is promoted by those savings. Money that is lying idle, and doing nothing to support the economy needs to be discouraged.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Bretton Woods Keynes charging for surplus, negative interest rates, Paul Tucker

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