Negative idea?

In a recent article in the New York Times Havard Professor Gregory Mankiw proposes the US Federal Reserve cut interest rates below zero. In essence a -3% interest rate means that one could take out a loan of $100 and only have to pay back $97 dollars in a years time. I have some bad news to those rubbing their hands with glee at the prospect of getting "free" money - Prof. Mankiw also outlines a mechanism that ensures this won't happen. Take every dollar bill - in a years time the Fed pick a random number from 0-9 and if that number appears first on the note it would be made redundant.

The idea is purely tongue in cheek (and the kind of extraordinary outside the box thinking that we need in these extraordinary times), but it does raise the issue of why 0% is considered the lower bound for interest rates.

Personally speaking I'm quite concerned about the drive towards low (even negative interest rates). Do we (developed countries) really need to be stimulating short term spending in this way to get back to our former level of long-term growth rates? Under-capitalised banks have been a symptom of our the current global economic malaise. Long story short - people borrowed too much and didn't save enough. Banking simply doesn't work unless the lender has the capital (savings) to finance their lending practices. In summary, people need to borrow money from other people's savings. This has to happen in the long-term regardless, so why are policy makers trying to squeeze every last consumption drop out of their respective populations? Surely if there wasn't some kind of paradox of thrift effect then the banks would become fully capitalised and start lending again, enabling us to move away from bank guarantee schemes, government re-capitalisation and nationalisation.

Surely we've learned that encouraging people to spend money for instant gratification is not a good thing. I'm not sure the need for balance is being addressed properly.

The only way is up?

Developments in the last day highlight the power/effectiveness(?) of the optimistic central bank forecasting.

http://www.rte.ie/business/reports/marketupdate.html

I sincerely hope he's right and the market seems to have confidence in his projections. Like Tricet in another recent post I feel he has very little to lose and a lot to gain by making optimistic projections.

However, I cautiously note that Bernanke also said the following at Milton Friedman's 90th conference in 2002:

"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."