Sunday, April 19, 2009

Mankiw: Go negative!

Here's another example of the bears popularity going to their heads. Last week, Gregory Mankiw said he was going to quit Facebook, because he maxed out the number of friends you could have on the site.

Today, in a NY Times article, he suggests the Fed should move interest rates into negative territory:

The problem today, it seems, is that the Federal Reserve has done just about as much interest rate cutting as it can. Its target for the federal funds rate is about zero, so it has turned to other tools, such as buying longer-term debt securities, to get the economy going again. But the efficacy of those tools is uncertain, and there are risks associated with them.

In many ways today, the Fed is in uncharted waters.

So why shouldn’t the Fed just keep cutting interest rates? Why not lower the target interest rate to, say, negative 3 percent?

And how would he get lenders to lend? Wipe out the value of 10% of the currency in circulation!

Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw — it’s a benefit.

Of course, our Fed, would treat this like any other of their programs. After a year, they would cancel the canceling of the money with the ignominious digit dooming it to destruction.

And this, my friends, is deemed serious enough to get print in the NY Times????

But if you really want to know what our bankers would do, just watch the girl below!

She says, "I hope those weren't crocodile tears.."

Of course, a crocodile eyes only tear when they are eating their prey!

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