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The bottom falls out

by Migeru Thu Sep 4th, 2014 at 08:46:17 AM EST

If you thought the ECB setting its deposit rate at negative 0.10% was the end of the road for interest-rate policy, you got another think coming:

4 September 2014 - Monetary policy decisions

At today's meeting the Governing Council of the ECB took the following monetary policy decisions:

  1. The interest rate on the main refinancing operations of the Eurosystem will be decreased by 10 basis points to 0.05%, starting from the operation to be settled on 10 September 2014.
  2. The interest rate on the marginal lending facility will be decreased by 10 basis points to 0.30%, with effect from 10 September 2014.
  3. The interest rate on the deposit facility will be decreased by 10 basis points to -0.20%, with effect from 10 September 2014.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.
How deep does the rabbit hole go?


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What does a negative ECB deposit rate mean? - De Nederlandsche Bank
What is the ECB's deposit facility?

The ECB acts as a bank for commercial banks. It enables banks to borrow money from it, and place money with it under certain conditions. The ECB applies various interest rates to these different facilities. The deposit rate is the return that euro area banks get for placing money with the ECB. Before the crisis, the deposit facility was hardly used, as the ECB aimed to lend exactly the amount of money that banks needed. In response to the crisis, the ECB made extra loans available to the banking sector as the interbank money market was no longer functioning as it should, and banks were reluctant to lend to each other. The result of these additional ECB loans is that for the past years a liquidity surplus existed in the euro area banking system, which banks have placed at the deposit facility with the ECB. A negative deposit interest rate means that the ECB will charge banks to park their surplus liquidity with it. 

So practically, that means banks need to pay more if they'd lend money to the ECB?

Yet since the rate already had gone negative previously, how much money have banks deposited since then anyway? (One'd guess very little, but I don't know.) But if that amount was very little or zero, what effect could a further decrease of the interest on the deposit facility possibly have?

by Bjinse on Thu Sep 4th, 2014 at 09:16:39 AM EST
So practically, that means banks need to pay more if they'd lend money to the ECB?

That is correct.

Yet since the rate already had gone negative previously, how much money have banks deposited since then anyway?

Quite a lot actually, going by the fact that the overnight rate is still closer to the deposit rate than the main refinancing rate, and spiking up on the end-of-month reporting days instead of spiking randomly up and down. That indicates that there is plenty of liquidity in the banks which can access the interbank market, which must mean that there's a high load on the deposit facility.

Remember that there are some non-trivial costs, both direct and reputational, associated with cashing out your excess reserves. So the support rate can go some way below zero before this becomes more attractive than the convenience of keeping your excess liquidity with the central bank's deposit facility.

The rate which can't go below zero without risking arbitrage against the central bank itself is the main refinancing rate - the rate at which banks borrow from the CB against sound collateral - and that one is still above zero.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Sep 4th, 2014 at 11:01:48 AM EST
[ Parent ]
But on your actual question, will this matter?

No. Ten basis points on the overnight rate doesn't matter to anybody who generates cash flow for the real economy.

There may be some expectations effect buried somewhere on the fifth decimal place, but as a rule of thumb "expectations" is what economists say when they want to distract you from the fact that they have no plausible causal story.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Sep 5th, 2014 at 01:38:15 AM EST
[ Parent ]
There's still 0.04%, 0.03%, 0.0000001% and so on.
by gk (gk (gk quattro due due sette @gmail.com)) on Thu Sep 4th, 2014 at 09:21:12 AM EST
There is thus only so much motivation on offer for the most productive to contribute anything productive.

Fun to check Zero Hedge on this occasion.

by das monde on Thu Sep 4th, 2014 at 11:40:17 AM EST
[ Parent ]


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Sep 4th, 2014 at 11:44:26 AM EST
[ Parent ]
Wait a minute. I thought the strong Euro was a problem.
by gk (gk (gk quattro due due sette @gmail.com)) on Thu Sep 4th, 2014 at 12:16:54 PM EST
[ Parent ]
Not really.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Sep 4th, 2014 at 12:23:05 PM EST
[ Parent ]
Then minor movements of the CHF shouldn't be a problem either.
by IM on Thu Sep 4th, 2014 at 12:27:38 PM EST
[ Parent ]
No, but the financial commentariat is full of hard money hyperventilators who think the Swiss National Bank is in danger.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Sep 4th, 2014 at 12:48:17 PM EST
[ Parent ]
 financial commentariat = waste of time
by IM on Thu Sep 4th, 2014 at 01:07:21 PM EST
[ Parent ]
Or to put it another way, full of ignorant people who don't understand the radical difference between propping up your currency and pushing it down (hint: you can't print foreign currency).

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Sep 4th, 2014 at 05:39:10 PM EST
[ Parent ]
The ECb is doing what is needed. Since Draghi the EBC has always done the right thing. The problem is fiscal.
by IM on Thu Sep 4th, 2014 at 09:51:26 AM EST
The problem is fiscal. So it's probably more accurate to say that the ECB is trying to do the right thing without having the right tools for the job.

But yes, at least Draghi sees the problem.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt št gmail dotcom) on Thu Sep 4th, 2014 at 09:54:09 AM EST
[ Parent ]
The ECB is doing the right thing on the overnight end of the yield curve. It's still Mr. Not Appearing In This Show on the ten-year treasury yields.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Sep 4th, 2014 at 10:50:34 AM EST
[ Parent ]
As far as I understnd ten year yiels are the lowest in history.
by IM on Thu Sep 4th, 2014 at 11:00:35 AM EST
[ Parent ]
They are still statistically distinguishable from zero in some member states.

Which is not correct interest rate policy at the present time.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Sep 4th, 2014 at 11:04:00 AM EST
[ Parent ]
The interest-rate policy is irrelevant when the problem is that the private sector demands a 15% return on equity in order to invest productively.

What is needed is the fiscal authority's risk-taker-of-last-resort function, which has all but been made unconstitutional in much of the EU.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Sep 4th, 2014 at 11:15:58 AM EST
[ Parent ]
When you have a public spending crisis, and public debt levels on the order of the annual GDP, and caps on the public deficit, then treasury rates become important.

Because under those conditions, the public sector's ability to act as cash flow source is constrained, bondholders take up a non-trivial share of this constrained cash flow, and bondholders have a lower marginal propensity to spend money into the real economy than just about anybody else the government could be generating cash flow for. If they didn't, they wouldn't be bondholders in the first place.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Sep 4th, 2014 at 11:28:27 AM EST
[ Parent ]
We still need QE.

Or something radical, like conjuring a market for collateralised infrastructure bonds out of thin air. However, that is unlikely to materialize, as the non-standardized nature of infrastructure finance means it's far more amendable to bank lending.

Still, we could perhaps wish for non-collateralised infrastructure bonds. The ECB could buy them too, en masse.

Or something even more radical: QE with the ECB eliminating all the purchased bonds...

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Sep 4th, 2014 at 05:39:52 PM EST
[ Parent ]
However...

Draghi is running out of legal ways to fix the euro

The ECB should start by ditching the inflation target and replacing it with a price-level target. This would signal to investors that if inflation is too low in one year, the ECB will make up for it by overshooting in the opposite direction the next.

The ECB should starting buying equities and junk bonds. It should subsidise mortgages and consumer credit. It could fund an investment programme in transport infrastructure, energy networks and scientific research, by buying debt to fund such projects at zero interest rates. All these measures would be effective. Most would be illegal.



Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Sep 4th, 2014 at 05:44:49 PM EST
[ Parent ]
The problem is fiscal.
Correct. But if the ECB is fine and the problem is fiscal, then the Growth and Stability Pact (and the European Semester, and the Six Pack, and the Two Pack) is a problem. And the prohibition of monetary financing of fiscal spending is also a problem.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Sep 4th, 2014 at 11:13:57 AM EST
[ Parent ]
I am not an economist, but can generally follow the debates very easily. Not in this case.

  1. So, with MarioD money has been made cheaper. Would this mean that the state crisis (Greece, Ireland, and Portugal) would not have happened if it were so during that time? Even if it was via lending to private banks that would then buy public debt?

  2. Where do we go from here? With Trichet it seemed very clear: Hell. But things are a bit blurry now. Are the state crisis repeatable at this stage? If not then what?

  3. Assuming that fiscal policy does not change much, is the ECB change enough to save the day? Or it is just slowing the inevitable crisis down the line?

Genuinely puzzled here...
by cagatacos on Sun Sep 7th, 2014 at 07:28:38 PM EST
[ Parent ]
Another puzzle: The British situation seems to be print (on the BoE front) and austerity (Osborne). Which is a mix of policies of sorts. Question: Would this be sustainable (I am not asking if this is desirable), because the numbers in the UK seem to be going in a not-that-bad direction...
by cagatacos on Sun Sep 7th, 2014 at 07:35:30 PM EST
[ Parent ]
The British way is better then the Trichet-Merkel Way of austerity and hard money all at once.

If you look at Europe at the development of the Eurozone prior to the increase of the rates in the beginning of 2012, things looked actually not totally horrible. Would it have been enough? Who knows. But the total downfall came when Trichet and Co. raised the rates prematurely.

by rz on Mon Sep 8th, 2014 at 04:01:48 AM EST
[ Parent ]
Rates were raised in mid-2011 but the destructive effects on the economy took a few months to materialize.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Sep 8th, 2014 at 04:37:44 AM EST
[ Parent ]
The Bank of England has been proactive where the ECB has been at most accomodative. In both cases the fiscal policy is "unhelpful". Britain benefits from smaller size so it can devalue (and has devalued, like Poland).

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Sep 8th, 2014 at 04:44:08 AM EST
[ Parent ]
  1. Imagine Mario Draghi's "whatever it takes" in 2010 instead of 2012. Then look at Greece and Portugal. Ireland was a different kettle of fish, more like Iceland, Spain or Cyprus.

  2. A long depression. Check back in 2030.

  3. What do you mean by "save the day"? The problem is fiscal. With low growth and declining investment public debt is unsustainable in most peripheral countries. Italy may well be the first one to go.

I wonder whether it will be AfD/CSU or Le Pen to pull the plug on the Euro. The former option is preferable.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Sep 8th, 2014 at 04:42:49 AM EST
[ Parent ]
As far as I get it, lower interest rates early one would have helped in that the private sector would have had better conditions.

However it would not have helped much with the problem of state debt interest rates. The interest rates on state debts I think look something like this: central bank rate + costs&profit of banks + risk of default. It is the last one that was the big factor in state crisis of Greece and Portugal. This has changed, not due to lower interest rates but due to ECB de facto backing the debt since september 2012, as long as the states keep up the austerity.

The last part is the remaing problem. States are guaranteed as long as they keep killing the economy, which can't go on forever. So while the ECB has lowered some of the risk, they still keep some there and actively enforce the very same fiscal policies that they criticise.

Or at least that is how I figure it.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Mon Sep 8th, 2014 at 05:13:10 AM EST
[ Parent ]
You could have the sovereign debt death spiral by earlier stating that the ECB will do 'everything necessary' to save the Euro. Exactly in the way Mario did it.
by rz on Mon Sep 8th, 2014 at 06:52:47 AM EST
[ Parent ]
I wanted to say:

You could have avoided the sovereign debt death spiral by earlier stating that the ECB will do 'everything necessary' to save the Euro. Exactly in the way Mario did it.

by rz on Mon Sep 8th, 2014 at 06:53:19 AM EST
[ Parent ]
central bank rate + costs&profit of banks + risk of default.

If the central bank offers money to governments at only slightly above its rate that collapses the opportunity for "costs&profit of banks" and the CB assumes the "risk of default". Effectively, a real CB can set the yield spread for the banks. In such situations the private demand for anything but a safe harbor collapses.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 8th, 2014 at 10:08:47 AM EST
[ Parent ]
should have said "has collapsed".

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 8th, 2014 at 10:12:44 AM EST
[ Parent ]
Migeru - The bottom falls out
How deep does the rabbit hole go?

Alice's Adventures in Wonderland (1866)/Chapter 1 - Wikisource, the free online library

The rabbit-hole went straight on like a tunnel for some way, and then dipped suddenly down, so suddenly that Alice had not a moment to think about stopping herself before she found herself falling down what seemed to be a very deep well.

(...) Down, down, down. Would the fall never come to an end!

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Sep 4th, 2014 at 10:24:05 AM EST
I'm no expert on string theory, but if you keep pushing on a piece of string, can it have negative length?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Thu Sep 4th, 2014 at 10:46:03 AM EST
Probably gives you access to FTL travel, which is handy because then you can go back in time and fix this almighty fuckup.
by Colman (colman at eurotrib.com) on Thu Sep 4th, 2014 at 10:51:55 AM EST
[ Parent ]
Shouldn't the question be whether it can have a negative number of dimensions?
by gk (gk (gk quattro due due sette @gmail.com)) on Thu Sep 4th, 2014 at 11:26:37 AM EST
[ Parent ]
eurogreen: "if you keep pushing on a piece of string, can it have negative length?" - Perhaps in economics.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 8th, 2014 at 10:11:39 AM EST
[ Parent ]


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