Why can’t the prime rate go negative?

It’s a problem the Fed has struggled to solve with complex methods like quantitative easing. The rationale is that even if you wanted to drop interest rates lower than zero in order to stimulate economic growth, you couldn’t–people would simply withdraw their money and hold it as cash. That’s why savings accounts always give you a positive rate of return, even if it’s very small.

Maybe I’m missing something, because it doesn’t add up to me. Cash is a very dangerous medium in which to keep your money, not to mention inconvenient. It’s probably even more dangerous than safe haven commodities (like gold). I would much rather store my money in a bank with a -3% interest rate than keep it in my mattress.

And if banks start charging a negative interest rate on their accounts, then lending at a smaller negative rate should start to look appealing, right? Without having to resort to more chaotic and destructive methods.

So, hypothetically–while inflation is low, banks start “charging” customers a -3% rate, the Fed lowers the prime rate to -2%, et voila, watch the credit flow!

Advertisements
Post a comment or leave a trackback: Trackback URL.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: