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Originally Posted by DBS.US
But what exactly are negative interest rates and how do they work?
Central banks have one key goal in mind when they cut rates: encourage people and businesses to spend their money.
That's why the Fed slashed interest rates to a historic low -- almost 0% -- in the midst of the financial crisis in 2008.
When people aren't earning any interest in the bank, they look around for other ways to make money.
Implementing a negative rate is an even bigger shock to jumpstart spending.
Janet Yellen: Negative rates possible in U.S. - Feb. 11, 2016 |
The 0.5% FED rates are allready hurting the banks... They need a higher rate of return to stop them from closing doors.
They want banks to give out loans to businesses and consumers and not having them excess resources piled up at the central bank but the delinquency rate on commercial and industrial loans is allready rising.
"When delinquency rates rise, they need even more income. They can seek out new borrowers. But these will have to be borrowers who did not qualify for loans before. They will be higher-risk borrowers. Yet the banks are facing rising delinquency rates from the "good" borrowers who did qualify."
There is no way out for the banks. In all previous cases of delinquency rates rising at this rate, there has been a recession.
The recovery is weak. Excess reserves are high. This holds down price inflation, but it also holds down economic growth. Economic growth is under 1% per annum. What happens if it turns negative? Delinquency rates will rise. This is a classic vicious circle.