Negative rates

It takes a bit of thought. When you lend money you take a haircut. That’s what negative rates mean. It’s supposed to stop banks redepositing, lending money to the real economy instead. But it’s not well thought through. Sub-zero rates lead to unanticipated problems. It sends out a very confusing message. We want banks to lend more but at the same time want their capital ratios to improve. The two things aren’t compatible.  The bankers’ unenviable choice is lower margins or more risk. No wonder bank stocks wobble. It’s also sending a strange message to public and private sectors alike; borrow more because debt servicing just got a lot easier. It doesn’t look at where the money goes. Does it finance consumption or investment? The real problem is that monetary policy isn’t having the desired inflationary effects. Too many banks have too many problems on their balance sheet already. Perhaps central bankers should toy with another idea. Instead of lowering rates further why not offer a “capital facility” and permanently exchange cocos for government debt on a par par basis? It’s a helicopter drop right on target and its bound to lead to inflation as bad debt is absorbed by the authorities who monetise it. Mad yes, but so is everything else that’s going on………………………………..