Macroscope | Why negative interest rates are doing more harm than good
As interest rates fall to zero or below banks become more reluctant to lend
With a small matter of US$12 trillion of bonds now trading at negative yields, our policymakers are left dumbfounded, like rabbits in the headlights, unable to do anything more than reduce interest rates to oblivion.
Just a short while ago, policymakers were talking of raising rates in the UK now, after Brexit, they are talking about lowering them. A particularly useless response, when rounds of cutting have merely served to debase the value of money, remove a major tool of economic management from their arsenal of weapons, and inbred bad financial behaviour. They have created a monster where money is cheap and plentiful and cheap but is stuck in big pools, moving sluggishly around the economy, like blood through hardened arteries.
...rounds of cutting have merely served to debase the value of money
Negative interest rates hurt the banks because their spare cash loses money when placed with central banks overnight. Rates are being kept low to encourage banks to lend but this is not happening because policymakers have created just too much cash. Big companies are cash rich and don’t need to borrow, and the risk of lending to small companies demands a much higher rate of return.
A bank is the ultimate example of a carry trade; simply where you lend for a long time at a 2-3 per cent spread, making good money - but at the risk of losing the whole 100 per cent of a loan if a borrower goes belly up. The banks need much higher lending rates to cover their bets to the smaller company sector.
Indeed, the banks are now so risk averse that new companies in Hong Kong can’t even open a bank account. I have been asked for three years of financial statements, the number of employees, and the status of the company’s MPF for a start-up. Of course, a new company doesn’t have these things – and a “no” generally means that you can’t open a bank account. Naturally the regulator, the Hong Kong Monetary Authority, has been silent about this dysfunctional element of our banking system.