Five months ago I told you about the possibility of negative interest rates. Since then a lot has happened around the world (besides confirming the existence of gravitational waves): the Fed raised the target rate a quarter of a point in December; many are increasingly questioning the viability of the global economy; analysts point to geopolitics as a concern for economic stability; and Japan is the latest country to implement negative interest rates.
An increasing number of economists and financial experts have since openly discussed the specter of negative interest rates here in the U.S, as volatility in financial markets and global economies have many concerned. Such concerns may have prompted Senator Bob Corker (R-TN) to pose this question about negative interest rates to Fed Chair Janet Yellen during her testimony in the February 11th hearing “Semiannual Monetary Report to Congress” (banking.senate.gov); “…people are beginning to observe that the Fed is out of ammunition, unless you decide to go to negative rates…I’m not proposing this, I’m just observing what’s happening around the world and what’s happening here in our own country. I think people are waking up and realizing that the Fed has no real ammunition left…”
Even though the Fed recently raised the target rate from being near zero after almost seven years, the Fed anticipates future increases. However, Dr. Yellen stated in the past that negative interest rates are “not off the table” if the economy falters. This was reiterated (more or less) during her February 11th testimony. Interestingly, Dr. Yellen revealed that the Fed considered negative interest rates back in 2010, but felt that negative interest rates would not have worked well to “foster accommodation” (increase money supply to the markets) at that time. Additionally, Dr. Yellen stated that “…we are looking at them again because we want to be prepared in the event we needed to add accommodation…” However, she also stated that the evaluation is not complete as it is not certain if negative interest rates would work well in the U.S.
Negative interest rates may seem like a good idea to stimulate bank lending; but Christopher Swann’s recent CNBC commentary (The consequences of negative interest rates; cnbc.com; February 16, 2016) indicates there are also unintended consequences. Lending, as a result, could tighten because of bank losses and subsequent liquidity issues. Consumers would bear the brunt of the losses as banks would increase fees. As banks try to recoup losses, depositors will be charged for savings; which may prompt consumers to move their money out of banks. Swann points out how Swiss and Danish banks have “…hiked borrowing costs for homeowners since negative rates were introduced.”
A CNN-Money report shed light on European banks and negative interest rate mortgage programs (The crazy world of negative rates: Banks pay your mortgage for you? money.cnn.com, April 22, 2015). Luca Bertalot, Secretary General of the European Mortgage Federation, stated that “We are in uncharted waters.” He went on to describe how banks dealt with the dilemma of negative interest rates, “…they [Spain’s Bankinter’s] could not pay interest to borrowers, but instead reduced the principal for some customers.”
Housing would undoubtedly boom in a negative interest rate environment. However, rather than paying consumers to borrow, a mortgage’s principal would be reduced over time. Rather than creating a bubble, long term negative mortgage rate programs could possibly devalue real estate; and change how we view it as an asset.
By Dan Krell
Copyright © 2016
Original published at https://dankrell.com/blog/2016/02/17/is-a-negative-mortgage-rate-program-in-your-future/
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