Buitler answers the question I've been asking myself for a while...

FT.com: Negative interest rates: when are they coming to a central bank near you? (Willem Buiter's Maverecon, May 7, 2009)

The Problem

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Economics as a science and economic reality have never had problems with negative real (inflation-adjusted) interest rates.  So what is the problem with nominal rates?  In a word, it's currency.

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Central banks have no problem whatsoever paying negative interest rates on deposits (reserves) held by banks with them.  Neither is it any more difficult to charge a negative interest rate on collateralised borrowing by commercial banks from the central bank than it is to charge a positive interest rate.  If there are Millennium-Bug-style problems with programs and spreadsheets that take the logarithm of a nominal interest rate (rather than the logarithm of one plus the interest rate, as any sensible person would have coded it), it's time to do some overtime correcting such silly `technical' obstacles to negative interest rates.  The brainless should not be in banking.

ROFL (this touches the content of my job in interesting ways)

With negative interest, the problem is not the owner turning up too often to claim his interest.  It is getting him to turn up at all.  Since the authorities don't know I am the owner of the currency I own, why should I volunteer to pay the government money for the privilege?

I invite you to go read the "solutions".

I have in the past linked to The case for negative interest rates now (Martin Wolf, November 20, 2008)

A conundrum has long been known to monetary economists, but only comes into the open during the once in a quarter-of-a-century type of recession apparently plaguing the global economy.

The quandary is how, in a conventional monetary economy, to bring interest rates down to the negative levels essential to speedy recovery during periods when there is a sharp decline in spending propensities.

If interest rates fall below zero, the public would simply seek to transfer their savings into hoards of banknotes.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith