Negative Interest Rates Are Social Political Poison

-edited

The interest rate business model is dead. Negative interest rates killed it, with no replacement in sight.

Anne Kunz and Holger Zschäpitz co-authored an excellent article for Welt (in German) called the Interest Rate Business Model is Dead.

Here are some excerpts via Google translate with many of my own modifications. For example, the title itself is my translation, not Google's.

Google has the title as "Business Model With the Interest is Dead".

I made an educated guess that Google's title isn't quite right.

I picked up the article from this Tweet.

Translation errors below may be Google's or mine. I took a fair amount of liberty, adding some words, deleting others, or changing the word order so the result makes sense to me.

Apologies to the authors for any of my errors.

Interest Rate Business Model is Dead

The cash cow bank lending model is dead, buried by the European Central Bank (ECB).

The coup de grace came at the recent meeting. As ECB President Mario Draghi squeezed the negative interest rate for banks even deeper.

The ECB will restart its bond purchase program in November. This time, without a time limit. Thus, the monetary authorities have permanently chained the long-term interest rate at a low level and cut the profit opportunities of the financial sector to a level that isn't sustainable. For a long time, institutions have made good money from the difference between long-term and short-term interest rates.That time is now over.

In 2016, Commerzbank employed more than 50,000 people. CEO Martin Zielke wants to close one-fifth of the 1,000 branches and even wants to part with an important source of income including his Polish subsidiary MBank. The workforce should be reduced to around 38,000 by the end of 2020.

The sale of Mbank is a desperate attempt at salvation.

In terms of stock market value, Deutsche Bank and Commerzbank are now loosely hanged even by more regionally active institutions from Norway and Sweden. [That is a direct translation that reads wrong but I do not know how to fix it].

Even the once proud Landesbanken is a restructuring case. This is a dangerous development.

"With the allowance, the ECB has relieved the German banks in the short term by around 500 million euros. At the same time, banks will be burdened considerably by the continuation of the low interest rates for an indefinite period, "says Peter Barkow, financial expert at Barkow Consulting. "Especially the German banks are very much dependent on income from the long-term investment of customer deposits at higher interest rates, called maturity transformation. This strategy only works very limited, "warns the expert. [The allowance refers to the ECB not charging banks a portion of the negative interest on excess reserves]

However, the corresponding earnings impact on the banks will only be delayed. "Many German banks have to find new sources of income in the medium term. In the short term, a further reduction in costs will probably be necessary, "says Barkow.

For more than a hundred years, banks lived on long-term lending or investing in securities their clients entrusted to them in the short term .

Historically, banks made money out of time. If time no longer has a price, because there is no more interest, nothing can be earned. Ten-year Bunds yielded around 1.5 percentage points more than two-year issues in historical terms. Currently, the difference is just under 0.2 percentage points.

In the multi-billion loan portfolios, the institutions are losing a lot of money due to ECB policy. Accordingly, the shares of Deutsche Bank and Commerzbank have fallen in sync with the interest rate differential. How dramatic the situation is for the banks, the analysts of JP Morgan have written down.

In a 120-page analysis, JP Morgan analysts calculated what effects the ECB policy will have on the banks. They used Japan as an example. Japan has had negative interest rates for some time now and there institutions have been unable to earn anything for two decades with time. The JP Morgan analysts' conclusion: Interest margins could continue to shrink and continue to weigh on the earnings side.

"The negative interest rate policy of the ECB is ruining the financial system and is a socio-political poison," says Frank Kohler, CEO of Sparda-Bank Berlin. The financial system is absurd if we have to explain to the children that money has a negative value - and thus debt is good, because you may not have to repay everything.

Socio-Political Poison

Bingo.

Thanks to Anne Kunz and Holger Zschäpitz for an excellent article and apologies again for any translation errors I may have made.

Mike "Mish" Shedlock

Comments (64)
No. 1-27
Tony Bennett
Tony Bennett

Central Bank Decision Making Tree

It has been very clear for a very long time that at the tippy top of the Tree rests "what will make the stock market go up?" Wealth effect reigns supreme. No matter what impact rate cutting / QE has on real economy.

gio1
gio1

early retired in august. do not trust the swiss pension system or any for that matter. took everything out in lump sum. and not paying back the mortgage.

gio1
gio1

and thanks for your blog Mish👍!!!

Bam_Man
Bam_Man

The post-Bretton Woods debt-based, fiat monetary system has already far exceeded its shelf life. Unfortunately, abominations such as negative interest rates are now required to keep it from imploding into a deflationary black hole.

Harry-Ireland
Harry-Ireland

Fantastic article. And these Germans are correct, it's poison to society, especially local communities that have a branch that still has humans working in it. All those jobs seem to disappear, those communities become more sterile and economically weaker because of these incompetent, yet destructive central bankers. I wish I could use a whole bunch of bad words here....but you already know about those words.
And again, like my comments in other articles, it really surprises me that the Germans are letting this happen. Is it the grand project of the EU which is above all? Are all Germans now castrated and afraid to speak their minds or is the discussion not public enough yet?

2banana
2banana

Those "closest" to the cheap and easy money will become richer and richer. Assets prices will continue to become more insane. The middle class will be further priced out.

The wealth gap will continue to get wider and wider.

Democrats will demand bigger and bigger government with more and more regulations and higher and higher taxes to fix it.

Sechel
Sechel

We've already given up on a "riskless" interest rate. Low rates are not only destructive to savings they also lead to mal-investment.

When the benchmark is meaningful a marginal or stupid investment doens't get done, when its zero to negligible well that's a whole different thing and suddenly every idea has a positive NPV

Matt3
Matt3

Was invested in community banking for over 30 years and have gotten out. I just don't see a future for banks lending at low rates. For smaller banks, the regulations and expenses don't make any sense. The smaller banks will go away and you'll have more mega banks - all too big to fail. These banks will be able to take huge risks at taxpayer expense and always have a bailout backstop.
Responsible people that save and want to retire are screwed. No way to get there with rates approaching zero without significant risks - and no bailout for you!
Zero interest rates (low or negative) are hurting economies and productive people.

abend237-04
abend237-04

Anyone remember the Lisbon Treaty enacted December 1, 2009? It fixed the flaws in the ECU founding treaty and has led, thus far, to negative interest rates, Lying Juncker and "Whatever it takes" Draghi, both now staring down the barrel of a Halloween Brexit. Germany really didn't care so long as her export engine and de facto monetary control remained intact. Now, she cares.

msurkan
msurkan

I don’t see what the problem is. With positive interest rates banks made money arbitraging the different rates of short and long term debt. Why can’t they do the same thing with negative interest rates? As long as there are differences between different maturities of debt you can still make money arbitraging those differences regardless of whether the rates are positive or negative. Instead of borrowing short and lending long maybe you borrow long and lend short?

Heck, if a bank can borrow money with a negative rate then they can just keep borrowing infinitely since they always have to pay back less than they borrowed. Seems like a foolproof way to make money.

Carl_R
Carl_R

One of the most interesting ramifications of negative interest rates is that the "proper" PE is historically about 1/(i+2) since stocks normally return a couple percent more than bonds. If the interest rate goes to -2%, then the PE goes to 1/(-2+2)=infinity. Similarly real estate prices can go to infinity as well. Why? Because if your return is negative holding cash, any positive return is better.

Je'Ri
Je'Ri

It is challenging when your bank asks you to keep no more than €10m in your current account at zero because they are getting wacked by the ECB to the tune of 40bp. I hate investing excess funds at -22bp ... legally I could stick to my guns and insist on zero as outlined in the original account agreemen, but they'd just terminate the relationship and I'd have to re-negotiate at new terms that could go severely negative the way the ECB is running the show. I'm torn because the banks have screwed us on fees for years, but a dead bank does nobody any good.

numike
numike

“A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank.” ― Ron Paul

Tester2
Tester2

How about the doom loop of creating institutions that grow more powerful, and closer to their ultimate target, through crises?

That's what the ECB and EU are. Answer to all crises is more integration that makes the ECB, EU more powerful. Like big sucking black holes that will crush all into one.

ECB will always encourage crises as will the EU until people shout STOP. through the ballot box or by direct action.

Webej
Webej

The Central Banks think they can:

  1. Force people to borrow/lend even if they don't want to
  2. Force people to spend, even if they don't want to, and are so desparate for a savings vehicle that promises wee bits of fixed income in the future, that they will forego even more spending to buy outrageously priced bonds.

Spend it now, you bad bad savers.

Borrow and spend or we will beat your cash out of you.

Country Bob
Country Bob

Big governments depend on big debt markets. The central bankers really didn't think through the long term consequences of wrecking the debt markets.

No government has ever gone to war with its own tax base and "won". They never will.

Think Vietnam, except its an economic war. The government will win every major battle, but still lose the war. Quagmire applies to economic wars too.

The failure of QE and ZIRP are a good example. Did you see the awesome power, the shock and awe, the glory of the King's mighty word? They unquestionably won the battle, but they now find themselves even further behind in the war.

Tester2
Tester2

Thinking ahead, can any real fix be created by the same people running the show now?

The answer is probably no as its outside of their ability to imagine.

So, who will be able to fix the mess? Who is in the wings with the right ideas?

We can say the old guard are unlikely to relinquish any control of the system without either complete meltdown or being forced out. Only complete collapse will discredit them enough and give fresh ideas a chance. Until then those in the wings are best waiting. Let the blame lie where it belongs.

Collapse it is with all the suffering that goes with it. Unfortunately it could lead fo a stronger ECB and EU in the interim.

Carl_R
Carl_R

Who was it who said "“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.” The fact that it wasn't Thomas Jefferson who said it doesn't mean that it isn't true. That's exactly what has happened in my lifetime.

thimk
thimk

Can remember my future father in law pulling me aside many years ago and advising me : Son he said , save your money ,the powers of compounding will grow your nest egg like magic. that is truly the American dream (last part i added)

bradw2k
bradw2k

Historians will note the curious lack of panic (can you say "slow growth"?) as all asset class yields approached zero presaging the monetary crises of the 2020's.

Solon
Solon

Banks, insurance companies, the entire financial sector will become one large morass of speculation. Capital will be consumed and accounting profits will disappear when the heroin is removed.

The similarities between the ongoing financial crisis and the one following the French Revolution are eerie despite the predictability of it all. We have slo-mo technology here in the Modern Age, and things can take a long time to play out, but despite that difference in pace, the Euro is now essentially the Assignat.

The faster things begin to move, the closer we will be to The End. That's another lesson the Assignat Economy taught us all. They will have to keep pumping harder and quicker to keep the economic ship from sinking.

djh860
djh860

I know that I can survive a recession. I've done that many times. I'm not sure that I can survive negative interest rates. Better the devil you know.

leicestersq
leicestersq

Are low/negative interest rates mostly caused by demographic changes?

With an ageing population and huge amounts of money being funneled into retirement funds, where can that money go? Most of it has to go into bonds as that is the law. The result is that bond prices go up and returns on those bonds fall. That is the price to pay when you have forced buyers in the system.

Also, as the number of workers falls, the opportunity to invest and make money falls as well, so demand for money for productive investment is falling.

Lastly, a central bank trying desperately to stop the banking system from having any casualties at all. I am sure that the ECB is buying bonds at top dollar in order to keep some banks in the EU from failing, so bond prices rise even more.

Seems to me like a triple whammy. Forced buyers for certain types of debt, misplaced CB intervention and falling opportunities for investment are bringing about these absurd rates. I am pretty sure that sooner or later something bad will happen, though I suspect it may take some time.

Mark Sircus
Mark Sircus

Well the elite has been dealing in poison for 150 years, poisons of every type, chemicals, heavy metals, radiation, soon 5G so frequency poison making money from everything, so now we have financial poison, one more method of mass suicide...I guess the psychopaths at the top have no other choice but to continue their rein of ruin otherwise they would risk becoming good, not much or any chance of that..................

jzhang
jzhang

Negative rates are just another form of default. It is just a more brazen way of borrowing without repayment.

Instead of defaulting after you borrow, now you default before you borrow.

The main consequence will be a scramble for alternative stores of wealth.

Nismo
Nismo

This is a good German doco on the subject (English version) https://www.youtube.com/watch?v=t6m49vNjEGs

runeksvendsen
runeksvendsen

Borrowing short to lend long is part of the problem. It defrauds both the depositor and the borrower while destabilizing the banking system.

For example, If I -- as a depositor -- make a three-month deposit, and the bank lends this to a company for 12 months, the bank has defrauded me of the higher interest (for foregoing to use my capital for 12 months) and the company (borrower) by the bank claiming it has capital available for 12 months, when in fact it's only available for three.

Earning money from taking a spread between the price offered to the depositor and the price offered to the company/borrower is fine -- all companies make money from taking a spread. Lying to the company -- by claiming the company has capital available for longer than it really has -- and lying to the depositor -- by lending out his capital for longer than he has agreed to -- is not fine.