Post: #1

http://www.zerohedge.com/news/2014-06-05...light-zone

Quote:“It won’t help the prospect of a functioning money market because banks won’t be compensated for the risk they’re taking,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. It would make more sense to lower the benchmark rate, thus reducing the interest banks pay on ECB loans, and keep the deposit rate where it is, Green said.

The ECB has lent banks more than 1 trillion euros in three- year loans, with the interest determined by the average of the benchmark rate over that period. Societe Generale SA estimates that cutting the key rate by 50 basis points would save banks 5 billion euros a year.

The deposit rate traditionally moves in tandem with the benchmark, which policy makers kept at a record low of 1 percent on June 6. Draghi said “a few” officials called for a cut, fueling speculation the bank could act next month.

I've been reading up on this, but doesn't such policy change the entire financial system greatly? Wouldn't this cause the repo market to die? What about people pulling money out of the banks and stuffing it into their mattresses?

Post: #2

It seems like a preventative measure against deflation. The disruption this may cause in money market accounts is outweighed by the specter of getting out of deflation once it catches on.

Also, its only 10 basis points of negative carry. Not a lot on bank reserves.

Best course of action: start buying hedged (if in U.S. dollars) European equities.

Post: #3

(06-05-2014 08:06 AM)Ardbeg Wrote:  Best course of action: start buying hedged (if in U.S. dollars) European equities.

Finance n00b here, can you explain this?

Post: #4

(06-05-2014 08:06 AM)Ardbeg Wrote:  It seems like a preventative measure against deflation. The disruption this may cause in money market accounts is outweighed by the specter of getting out of deflation once it catches on.

Also, its only 10 basis points of negative carry. Not a lot on bank reserves.

Best course of action: start buying hedged (if in U.S. dollars) European equities.

Anyone who even considers themselves an expert should know this is going to snowball in a bad way.

I do not trust these financial institutions to have any clue on what they're doing.

Post: #5

Negative interest rates are a sign of a very UNhealthy economy. It means that if a bank loans you 10,000 at -1% interest rate (simple one year loan), one year later you pay them back $9900.

It can cause a deflationary spiral, which happened in the great depression.

http://en.wikipedia.org/wiki/Deflation#D...ary_spiral

Post: #6

One of the great untold stories is how the Banksters are robbing the savers of their wealth through negative real interest rates to recapitalize from the loss of their irresponsible gambling projects. The US isn't any better. Nobody seems to care and the corporate controlled media won't bring up the issue. Today, the market exploded on the ECB news. The Russell which has been lagging had an hour and a half rally. Wall Street likes the news of the transfer of wealth from savers to their pockets.

Post: #7

Should be good for gold, too.

This is a big problem with a cashless system. Also, won't the money be paid to the banks, which are already making a nice spread between the Central Bank rate and what they charge for loans, credit cards, etc?

Post: #8

(06-05-2014 08:10 AM)frenchie Wrote:  

(06-05-2014 08:06 AM)Ardbeg Wrote:  Best course of action: start buying hedged (if in U.S. dollars) European equities.

Finance n00b here, can you explain this?

The goal of the ECB is the same as was for the Federal Reserve three years ago: very loose monetary policy, with low interest rates to encourage people to shift money from bonds into stocks. With a still fragile European economy flirting with deflation, the ECB wants the public (read: Germans) to take their savings out of their bank accounts (where they will earn a lower rate of interest than before) and put it into the stock market. This will push up the market, creating a "wealth effect," where people see their brokerage accounts swell up and feel wealthy. The hope is this will encourage people to start spending more (because their portfolio just went up 25%), which will improve the economy and create some healthy inflation. That's the plan.

Again, the plan is to make the European markets go up. But with the ECB loosening monetary policy, the Euro will likely depreciate against the dollar (a flood of Euros will create excess supply, lowering the price of the Euro versus the dollar..i.e. the Euro will depreciate against the dollar). So if you are an American with dollars buying European stocks, and European stocks go up but the Euro depreciates by the same amount you end up essentially same (though it's very unlikely they would move the exact same amount. Likely the markets would go up say 15% and the Euro would depreciate 8%). That's why you would want to hedge the currency risk.

If you decide to play this angle, WisdomTree has a hedged European equity fund:

http://www.wisdomtree.com/etfs/fund-deta...x?etfid=73

Post: #9

It only applies to banks to my understanding, not to private savers.

Post: #10

I usury-based debt system always ends badly which is why it was either banned in history or regulated by jubilee years which annulled compound interest debt.

Post: #11

(06-06-2014 03:53 AM)w00t Wrote:  It only applies to banks to my understanding, not to private savers.

Yes, it applies to the excess capital banks keep at the ECB. But it is reasonable to assume that the banks will try to pass along the cost of the negative interest rates to customers. While banks might not charge customers for keeping money in their account, the interest rates customers receive (even on large account balances) would fall to a flat zero.

And even with small amount of inflation, a zero interest on your savings account is essentially a negative rate of return.

Post: #12

This is just a way for a bank to take a loan from the ECB and pay back less than what they borrowed. It's nothing more than a bailout for the many broke Eurozone countries like Greece.

The problem with bailouts, of course, is that they do nothing to address the root problem of inefficient broken governments. Instead of letting courrpt systems fail, bailouts prop them up and keep bad systems in place which will only grow more costly over time.

I wonder how long it will be until the Euro dies?