Thursday, February 18, 2016

Negative Interest Rates to Set Stage for Next Crisis

Stephen Samuel Roach, an American economist who serves as senior fellow at Yale University’s Jackson Institute for Global Affairs and a senior lecturer at Yale School of Management recently warned of new risk that will be introduced through NIRP.  He warned that NIRP will set the stage for the next crisis.  Or is this the beginning of one?

Here are some comments by him, NIRP "could well be a final act of desperation, central banks are abdicating effective control of the economies they have been entrusted to manage. First came zero interest rates, then quantitative easing, and now negative interest rates — one futile attempt begetting another." and "could be the greatest failure of modern central banking. Yet denial runs deep. ".

How will this lead to?

"The shift to negative interest rates is all the more problematic. Given persistent sluggish aggregate demand worldwide, a new set of risks is introduced by penalizing banks for not making new loans. This is the functional equivalent of promoting another surge of “zombie lending” — the uneconomic loans made to insolvent Japanese borrowers in the 1990s. Central banking, having lost its way, is in crisis. "


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