Bernanke Urges Use Of Negative Rates When Next Recession Strikes

Tyler Durden's picture

Two months after Bernanke's unexpected trip to Japan failed to unleash the "helicopter money" many expected his visit to the BOJ would deliver, Bernanke is back with another shocking policy appeal, this time not as a result of a trip to the Pacific Rim, but in a post on his Brookings Institute blog, titled "Modifying the Fed’s policy framework: Does a higher inflation target beat negative interest rates?"

The post, when one cuts out the noise, is nothing short of praise for NIRP as an alternative to inflation targeting, and a strong suggestion that it should be implemented in the US if and when the US economy slides into recession next.

Bernanke starts off by saying that while much of the recent "shift" in unconventional thinking has been to  advocate a higher inflation target, he believes that negative rates present an as good if not better option. The former Fed chairman says that "when the next recession arrives, there may be limited room for the interest-rate cuts that have traditionally been central banks’ primary tool for sustaining employment and keeping inflation near target. That concerning possibility has led to calls for a new monetary policy framework, including by Fed insiders like John Williams, president of the San Francisco Fed. In particular, Williams has joined Olivier Blanchard and other prominent economists in proposing that the Fed consider raising its target for inflation, currently 2 percent. If the Fed targeted a higher average level of inflation, the reasoning goes, nominal interest rates would also tend to be higher, leaving more room for rate cuts when needed. "

Here Bernanke expresses his surprise that some of his "erudite", Ivy-educated peers have already dismissed the use of negative rates in the future. We assume he has purposefully ignored the repeated, ever louder complaints by Deutsche Bank and Credit Suisse as well as virtually every pension fund in the world, lamenting that they are slowly going out of business due to the twilight zone of unorthodox monetary policy:

Some advocates of a higher inflation target have been dismissive of the use of negative short-term interest rates, an alternative means of increasing “space” for monetary easing. For example, in a recent interview in which he advocated reconsideration of the Fed’s inflation target, Williams said: “Negative rates are still at the bottom of the stack in terms of net effectiveness.” Williams’s colleague on the Federal Open Market Committee, Eric Rosengren, also has suggested that the Fed may need to set higher inflation targets in the future while asserting that negative rates should be viewed as a last resort. My sense is that Williams’s and Rosengren’s negative view of negative rates is broadly shared on the FOMC.

So before the last rites of NIRP are read, here comes Blackhawk "Chairsatan" Ben to try to rekindle the possibility of negative rates in the US.

As I explain below, negative rates and higher inflation targets can be viewed as alternative methods for pushing the real interest rate further below zero. In that context, I am puzzled by the apparently strong preference for a higher inflation target over negative rates, at least based on what we know now. Yes, negative interest rates raise a variety of practical problems, as well as political and communications issues, but so does a higher inflation target.... I argue that it’s premature for policymakers to emphasize the option of raising the inflation target over the use of negative rates. Pending further study about the costs and benefits of both approaches, we should remain agnostic about whether either or both should be part of the Fed’s policy framework.

A quick skim of his post reveals the fallacy inherent in his thinking, namely that punishing savers either with increasingly more negative rates or progressively higher inflation goals, will force them to rush out and spend.

Economic theory suggests that aggregate demand (consumption and investment) responds to the real rate of interest, which is the nominal (market) interest rate minus the public’s expected rate of inflation. As I noted in my earlier post on negative rates, the Fed has routinely set the real federal funds rate at negative levels (i.e., with the nominal funds rate below inflation) to fight recessions. However, with the inflation target at its current level of 2 percent, and assuming that the Fed does not set its policy rate lower than zero, the Fed cannot reduce the real policy rate below -2 percent, i.e. a zero nominal rate less 2 percent expected inflation. History, including the experience of the past few years, suggests that—in the absence of a robust fiscal response—that may not be enough to deal with a bad recession. To reduce the real policy rate further, the Fed would either have to lower the nominal interest rate into negative territory, raise expected inflation (by raising the inflation target), or both. Since negative nominal rates and a higher inflation target both serve to reduce the lower (negative) bound on the real interest rate achievable by monetary policy, they are to some extent substitutes.

What Bernanke spends zero time on is the practical consequences of NIRP, which as we previewed one years ago, and which even the WSJ now admits is the case, forces savers to save even more, since they know they can't rely on their cash to generate interest income, forcing them to limit their spending further as they prepare for retirement in a world in which saving is not only not rewarded but punished, and where real wages continues to decline year after year. Of course, one has to be a Princeton economist living in an ivory tower not to grasp this most simple observation.

In any event, to make the case for NIRP, Bernanke lays out several factors why he thinks negative rates are preferable to inflation targeting, such as:

  • "Ease of implementation":  "Negative interest rates are easy to implement. In practice, central banks in Europe and Japan have imposed negative short-term rates by deciding to charge (rather than pay) interest on bank reserves, an action that is clear, concrete, and essentially instantaneous"... "In contrast, while the Fed could announce at any time that it is raising its inflation target, the announcement would not increase the Fed’s ability to lower the real interest rate unless the public’s inflation expectations changed accordingly"...  "The public might also have reasonable doubts about the Fed’s ability to reach the higher target or about the willingness of the Congress or future Fed policymakers to support a higher inflation goal, both of which would reduce the credibility of the new target and thus its ability to influence expectations."
  • "Costs and side effects": "negative rates can create problems for money market funds, banks, and other financial institutions, costs that would have to be managed if rates remained negative for very long. These concerns are legitimate, since effective transmission of monetary policy requires a properly functioning banking and financial system." However, he explains that "there are also means by which central banks can limit the effects of negative rates on bank profits—by charging a negative rate only on a portion of bank reserves, for example, as the Bank of Japan has done."

On the other hand, "higher inflation has costs of its own, of course, including making economic planning more difficult and impeding the functioning of markets. Some recent research suggests that these costs are smaller than we thought , particularly at comparatively modest inflation rates. Higher inflation may also bring with it financial stability risks, including distortions it creates in tax and accounting systems and the fact that an unexpected increase in inflation would impose capital losses on holders of long-term bonds, including banks, insurance companies, and pension funds."

At this point a vague image emerges why Bernanke wants NIRP over higher inflation targeting: while NIRP is an "ice age" equivalent for banks, it does not shock the system into a sharp selloff. On the other hand, as the recent days have shown, even the smallest hint of a spike in forward inflation, leads to dramatic selloffs across the bond curve, which immediately transmits over to equities and other risk assets. In other words, all Bernanke is likely petitioning with his latest post, is to prevent a market rout.

  • "Distributional effects", or who suffers (the most) from the Fed's ongoing lunacy: "The most direct costs of higher inflation are borne by holders of cash, and, again, with a higher inflation target those costs would be experienced at all times, not just during recessions. More generally, less wealthy people may find it more difficult to protect themselves from inflation. In contrast, negative rates would probably most affect more financially sophisticated and market-sensitive firms and households. In particular, banks would probably not pass on negative rates to small depositors, with whom they want to maintain profitable long-run relationships, but instead would more likely impose negative rates on “hot money” investors who place less value on longer-term relationships."

Going back to our point above, Bernanke then explicitly warns that "the transition to a higher level of inflation would hurt holders of
bonds and other non-indexed assets while providing a windfall for
debtors, including mortgage borrowers.
In the medium term, nominal
returns to saving (including the investments of pension funds, life
insurance companies, etc.) would be higher with a higher inflation
target, but the real (net of inflation) returns received by savers would
be similar under either regime.

  • "Political risks" - we found this point most interesting, because this is the first discussion by Bernanke in an semi-official document of what the angry, populist response to years of Fed failure will look like. For now, he is mostly focused on public anger falling on Congress (even though the Marriner Eccles building is so close). What he says is that "both negative rates and a higher inflation target would be politically unpopular, possibly leading to reduced support for the policies of the central bank and for its independence. In particular, as already noted, the credibility of a higher inflation target could be reduced if political support for it were seen to be tenuous. Political viability is thus an important concern in judging these policy options."

What Bernanke seems to believe is that while both are clearly unpopular, the public's distate for NIRP is less than that to soaring inflation: "in the political sphere, the fact that negative rates would be temporary and deployed only during severely adverse economic conditions would be an advantage. Like quantitative easing, which was also unpopular in many quarters, a period of negative rates would probably be tolerated by politicians if properly motivated and explained. We have some evidence on this point: Negative rates are disliked by many in Europe and Japan but central banks have been willing and able to use them without facing high political costs, at least so far."

Alternatively, "a higher inflation target would be a permanent, or at least very long-lasting change, not restricted to an emergency; and it would raise questions about the flexibility of the Fed’s legal mandate to achieve price stability. It thus might need explicit approval or at least some sort of review from Congress. A possibility, recently proposed by a comprehensive study on monetary policy options, would be to set up a commission to assess potential changes in the Fed’s policy regime and to report to Congress and the public."

And here comes what may be a very prophetic warning by Bernanke, inasmuch as his intention is to push for NIRP, namely that if and when inflation goes out of hand, that will be final straw for the Fed in its current format, and even Keynesian economics:

In the United States, as in Europe, there is a substantial element of public opinion (well represented in legislatures and even in the central banks themselves) that holds that central banks should concern themselves only with inflation, and that efforts to use monetary policy to stabilize employment are illegitimate or impractical. These views have manifested as opposition to the Fed’s accommodative policies in recent years, and even in legislative efforts to eliminate the employment part of the Fed’s dual mandate. Holders of this perspective would be unimpressed by the cost-benefit analyses of the Keynesian proponents of a higher inflation target. To the contrary, they would strongly oppose choosing higher inflation in order to give the Fed more room to respond to employment fluctuations, and indeed might seek a lower target. In their efforts they would be aided by the public’s money illusion (the tendency to confuse general inflation in both wages and prices with changes in real wages). Whatever the abstract merits of a higher inflation target, if it is not politically achievable then it is of no benefit.

To summarize all of the above, Bernanke has emerged as a big supporter of NIRP and is quite hostile to the incipient line of thought at the Fed and elsewhere, according to which the next monetary policy to be attempted - ahead of or during recession - should be 4% (or more) inflation targeting.

This is his conclusion:

It would be extremely helpful if central banks could count on other policymakers, particularly fiscal policymakers, to take on some of the burden of stabilizing the economy during the next recession. Since that can’t be assured, and since the current low-interest-rate environment may persist, there are good reasons for the Fed and other central bankers to consider changes in their policy frameworks. The option of raising the inflation target should be part of that discussion. But, as I have argued in this post, it is premature to rule out alternative or potentially complementary approaches, including the possibility of using negative interest rates.

Bernanke may - or may not, if the recent helicopter money snub in Japan is any indication - get his wish, but NIRP is most likely irrelevant: as we reported three weeks ago in "Fed Admits Another $4 Trillion In QE Will Be Needed To Offset An "Economic Shock", what happens in the next recession is neither NIRP nor inflation targeting but another doubling of the Fed's balance sheet. In other words, while economists will argue what is the appropriate monetary response to the next recession, when by now it is clear that any central bank intervention will only make the problem worse and the underlying problem is not the business cycle but the Fed itself which should be eradicated and abolished immediately to stop the perpetuation of unprecedented asset bubbles, the Fed is already strategizing how to inject another $4 trillion in the stock market and to bring the Fed-enabled LBO of the equity market to a successful, for the 0.01%, conclusion.

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Implied Violins's picture

THAT asshole? There is no Vaseline in his fucking sand.

In other news, I'm going into the noose business. 100% pure hemp, coated in capsaicin.

Cursive's picture

He's a little pussy keyboard warrior now.  Like to see him say this as Fed Chair.  Death to BernanQE!

BennyBoy's picture


Face it.

This monetary system makes no mathematical sense for anyone but the banks.

We need a new monetary system that makes mathematical sense for everyone.

The banks become like heavily regulated utilities.

Bill of Rights's picture

Well than this is exactly what they want to hear from the masses to usher in the NWO full boat...

NidStyles's picture

Naw it's working out for the Jews just fine. They have never been richer in all of recorded history. Nor have they ever been in so many positions of power in European nations and in the west in general.

dcohn's picture

STOP blaming the fucking Jews.  There are plenty of Jews that are not rich and are not shits.

More important there are plenty of bankers that are NOT JEWS.  Yes a lot are Jews but do you really think they follow that friggin religion rightfully.  The religion itself is like all religions a brainwashing.  

That said I understand the reason you may want to hate certain sectors of society but by blaming any fucking race all you do is give the Fed and gov exactly what they want.  In fighting between people so we do not look at the gov or bankers fucks.

I hate the fucks as much as you.  I was born a jew but no longer practice nor believe.  I hate the fucking bankers and Soros and Israel including the way they talk and act and obviously attack Paletinians.  

BUT IN THE SAME WAY most Israelis hate the Israeli gov.  It was back in the late 70s when Israel was taken over by the Mossad.  So they are fucked up as the US now but again the Israeli cictizens are not all bad people.

Muslims are not all bad people.  I am not suggesting we open our borders etc but I am suggesting that we learn to be at peace with like souls.  Those of us that work for a living and just want to live normal lives without these fuckheads taxing us to death and destroying our chances of being just regular fucking people.

WHY IS THIS SO HARD TO GET INTO PEOPLES HEADS.  We are the fucking power.  If we would just learn to fucking get along we could take our shit back.  DAMN its really just a way to think.  IE like souls must work together.  I will not hate others simply because of their skin color or religion.  If they do something dumb yes it sucks but blame the whole group because of a few assholes.  Insane

giggler321's picture

What you've said is very meaningful and good but the last part about the power are the people - how are you or a group of you or anyone else for that matter going to change what they want?  voting is meaningless, so what's next?

VWAndy's picture

 An energy valued MOE should work just fine. For producers. The free shit army too. After they go out and get real jobs.

agstacks's picture

"The people wpuld go for it if they believed it was a one time policy that wouldn't be repeated" 

Where did I hear that before. We don't believe you Ben. Suck an egg. 

VWAndy's picture

 His head would look better on a stick. Just sayin.

brada1013567's picture

I urge the use of Bernanke as a crash test dummy.

Nobodys Home's picture

As if anything important instituted by .gov and the fed. is temporary.

Phat Stax's picture

So we can turn into Japan?  That seems to be working quite well.

BeerMe's picture

Anyone that proposes negative rates deserves a firing squad!

More Ammo's picture

Ballistics Gel it is then!

NEOSERF's picture

You lost me at "temporary" Uncle Ben..

Consuelo's picture



Dropping rates or even negative rates will get blown past like a speed limit sign in a roadrunner cartoon.    


That $4-Trillion 'option' is what's on deck.   And they all know it too...

VWAndy's picture

 We are negetive now and have been from the second intrest rates went below the actual rate of true inflation. Sorry its another chain yank.

sramsey's picture

Brilliant, just as boomers are retiring Dr B and the other academics want to "tax" their savinga via negative rates.  Answer me this Dr B: How is raising taxes on savings going to boost agg demand?  You propose to fight deflation w/ the definition of deflation.    Negative 40 bps isn't helping Europe, maybe -5% w/be better, is that what you think?  You and Rogoff are clueless on real world.  



Bluntly Put's picture

Bernanke meets all the criteria for the definition of a shill.


Could someone please decapitate Bernanke and send his head to a Taxidermy contractor?


I will pay postage & handling if you send it to me in CANADA so I can hang it above the fireplace mantle.

rejected's picture

There isn't a word in any languge that aptly describes these jerks. They'll not stop until they own it all.

And they got it for free,,, Force us to use their paper then print up trillions and buy everything up telling the dumbshits they're trying to save the economy that they screwed up.


SharkBit's picture

Wonder if this guy realises how hated he is?  Ben, find hole, crawl in, sign off alreaady.

E.F. Mutton's picture

How about we try Negative Foreign Aid as well.  Starting with Israel.

RabbitOne's picture

The hand writing is on the wall “...time to get all excess cash out of the bank account...”

GunnerySgtHartman's picture

Yes sir, get it all out except for 4-6 weeks' worth of expenses.

Professor Know Nothing's picture

You quit sir. So shut the fuck up.

The Duke of New York A No.1's picture

Rates are already negative when factoring the hedonic-pricing measures used for cooking the CPI.

the not so mighty maximiza's picture

yeah creating bank runs would be genius

Money Counterfeiter's picture
Money Counterfeiter (not verified) Sep 15, 2016 1:06 PM

Joooos creep me the fuck out.  Stupid and they have power.  What a fucking nightmare.

Soul Glow's picture

I like it.  Push everyone out of cash and into gold.  Good idea Ben.

Baby Eating Dingo22's picture

Benny obviously warming up the crowd for the next stage of insanity

After all, ZIRP was only "temporary" too

vesna's picture

Fuck you Bernanke!

buzzsaw99's picture

some people think the stock and bond markets are going to go down. lol

sportofkings's picture

Corrupt or Incompetent?

dhemaius's picture

Stop this madness already!

Chippewa Partners's picture

He's moving up the list...... Extraordinary scumbag.

jamesmmu's picture

AGAIN! Bad Economic News Drives Stocks Higher! Data Have Reduced The Chance Of A Fed Hike Next Week And Dec.

WTFUD's picture

Thought this BarSteward was deaded. Must have returned from the grave feeling he didn't cause enough damage. If there were any justice or God in this evil world then this CUNT would have been hung, drawn and quartered live on MSM.

seek's picture

The ridiculousness of this all never ceases to amaze me.

We have a system that's utterly dependent on supplementing tax revenue with both printed money and the stealth tax hidden in the spread between interest rates and inflation. Then the geniuses game the CPI to make inflation zero, so they have to go to negative rates to keep the spead happening.

There's not enough money in the world to satisfy them, so they're going to blow the whole thing up. I used to think it was a deliberate plan, but I'm really starting to think they've just mentally masturbated to the point they're blind. It really does seem that they actually believe this shit!

Just more impetus to unplug from the system. God knows they've got to kill cash and PMs in a hurry to make this fly.

To Infinity And Beyond's picture

This idiot would not have made it a week in the real business world. Maybe folks will see the bankers have led them to the brink of a nuclear war. All to hide the disasterous effects of their policies. 
Will folks have enough courage to stand up and finally say "enough is enough"?
Sadly, I doubt it. 

HumourMeBlack's picture

A Christmas sack of sh..coal??

You better watch out

You better not cry

Better not pout 

I'm telling you why

Minus rates are coming to town!

Offthebeach's picture

Couldn't we burn up some goats in solid gold  braziers in front of New York Fed building?

wow thats crazy's picture

When Empires debased money you could tell by the amount of gold in the coin. A gold coin would have less then 100% gold in it.

The problem with fiat is no matter how much they debase it, it still looks like a the same piece of shit paper as it did before.

So they can print and print! We need price to be set buy gold and bitcoin!

VWAndy's picture

 An energy valued coin will do far better long term.

BSHJ's picture

I wish someone would explain how the 'world' ever functioned prior to 10 years ago with REASONABLE (like 4% to 6%) interest rates! You know, rates that resulted in making it worthwhile to SAVE money and rates on loans that caused the cost of goods to be much lower. I just do not understand!!

GoldMiser's picture

By "When the next recession strikes" does he mean after this one slips into depression?