If you think people who save money are being punished by low interest rates, wait until they have to deal with negative interest rates.
Slashing rates well below zero to make it painful not to spend money is the desperate approach to avoiding an economic depression recently endorsed by Larry Summers, President Obama's former top economic advisor and one-time pick to run the Federal Reserve. With economic growth likely to be weak for the next infinity, the job market stubbornly awful and inflation disappearing, central bankers around the world have been toying with the idea for a while. Every day it gets closer to being a reality.
The European Central Bank is considering making European banks pay 0.1 percent interest on the cash they store at the ECB for safekeeping, Bloomberg reported on Wednesday. This would be a watershed moment in central banking, moving from the Federal Reserve's once-radical zero interest rate policy (ZIRP) into the unexplored territory of negative interest rate policy (NIRP).
Meanwhile, across the pond, St. Louis Federal Reserve President James Bullard told Bloomberg TV he thought the Fed should consider making U.S. banks pay money to park cash, too. He's been saying this for more than a year, but the idea is slowly gaining more credence.
That is because, even though the Fed has had a ZIRP in place for nearly five years now, that has not been enough to get the economy up to full speed.
The Fed has tried to goose the economy a little more by promising to keep its key short-term interest rate near zero for years. Last year, it promised to keep ZIRP in place until unemployment fell below 6.5 percent, something it doesn't see happening until at least the middle of 2015. Lately it has started promising to keep rates low for a long time even after unemployment falls below 6.5 percent, a promise Fed Chairman Ben Bernanke repeated in a speech on Wednesday.
But even that might not be enough: Some economists think interest rates should be much, much lower than zero: Maybe negative four percent, before adjusting for inflation. Summers recently warned that the U.S. and other big economies could be in a near-permanent state of malaise -- like Japan since the 1990s -- because interest rates are still too high even at zero. Many liberal economists, including Paul Krugman, think sharply negative interest rates could be the only way to deal with this.
To be sure, a recalcitrant Republican Congress has been a huge part of the problem, pushing the economy hard in the wrong direction with endless austerity measures. Republicans are also among the first to claim that the Fed's low interest rates are punishing savers -- a bogus complaint, because savers benefit from a strong economy, too. But even without the puritanical impulses of the Republicans, the economy would probably be stuck in lower gear.
Central bankers aren't talking about making people pay interest on their own savings. Not yet, anyway. The political outcry over that is easy to imagine. But they could find other, more creative ways to make it painful for you to hold onto cash. Giving money an expiration date or using electronic money in order to help control the flow of it are just a couple of the more creative ideas.
Many of these ideas are not close to becoming reality. Even the modest proposal to make banks pay interest on their own cash might be met with howls of protest, especially when banks are also being pushed to take fewer risks and keep higher capital levels. But a couple more years of stagnation and pain could make these ideas look better and better to increasingly desperate policy makers.