According to Wikipedia (which isn’t really a great source, but it’s a good place to look for some understanding):
The zero interest rate policy (ZIRP) is a Keynesian macroeconomics scheme for economies exhibiting slow growth with a very low interest rate, such as contemporary Japan and since, December 16, 2008, the United States. Under ZIRP, the central bank maintains a 0% nominal interest rate. The intended effect of a ZIRP is to encourage investment throughout the economy by making capital purchases more financially attractive. Whether ZIRP succeeds in achieving this goal is a matter of much debate.
So here we have it… nine economic powerhouses all with Zero Percent Interest Rates. What a conundrum.
A global experiment in zero interest rate policies
I came across a very interesting little PDF on the Dallas Fed’s website while I was looking up the effects of Zero Interest Rate Policy (ZIRP). The document is entitled “Monetary Policy in a Zero-Interest-Rate Economy” which is based on a presentation from 2003 by Evan F. Koenig, Vice President, and Jim Dolmas, Senior Economist, Research Department, Federal Reserve Bank of Dallas.
I personally believe that at least as far back as 2003, the Fed was well aware of what was about to happen to the American economy and was planning for it accordingly. The interesting thing is that I do not believe they were expecting such a global economic cluster-fuck, but then again, maybe they were.
It’s quite entertaining to read this in 2009 and see which approaches have been taken and whether or not they have been effective. These quotes are fantastic. I have added some whimsical translations at my leisure.
If short-term interest rates fall toward zero, it may be necessary for the Fed to re-think how it conducts monetary policy.
We’ve never really been down this road before and the Japanese aren’t exactly a good example to follow, so we may have to change the rules of the game
The U.S. Great Depression is the textbook example of what can go wrong if policymakers are slow to respond to a deteriorating economy and falling inflation.
We’re going to do exactly the opposite of everything we did back in the 30′s and hope it works.
Recovery didn’t begin until 1933, when the Roosevelt administration suspended gold payments and allowed the dollar to depreciate. Inflation rose well above the nominal interest rate, turning the real interest rate sharply negative.
Roosevelt decided to bend over our creditors as well as our own citizens by both suspending gold redemptions and confiscating gold from honest Americans. Furthermore, he did not even have the common courtesy to give anyone a reacharound in the process. **Interesting side note*** Now that the Dollar is no longer backed by anything, it will be interesting to see what happens.
…recent declines in industrial output have raised concerns that the U.S. economy may be stalling out. With the nominal interest rate so close to zero that conventional open-market operations are of doubtful effectiveness, what policy options are available to the Fed, should further stimulus be required?
We don’t think this charade can last much longer. We’ve let all of our tricks out of the bag. What can we do to keep the up the fraud known as the American economy?
Among these more workable approaches are strategies that require the coordination of Fed policy with that of other actors–either foreign central banks or domestic fiscal policy-makers–and strategies that the Fed can follow unilaterally.
We can take this scam to a global level (see the chart above..lol).
By coordinating with fiscal policy, the Fed could even implement what is essentially the classic textbook policy of dropping freshly printed money from a helicopter.
This previous quote is just absolutely hilarious. It needs no translation. HELICOPTER BEN to the resuce!!!
The scale of operations entailed by this approach would be large–to monetize government spending equal to 1% of GDP, for example, could mean increasing the monetary base (the sum of currency and bank reserves) by as much as 15-20%. Though trite to say, it is nonetheless true that extreme times could require extreme measures.
We may have to inflate the shit out of the money supply in order to make this work, and it’s probably going to backfire on us, but we should give it a shot anyway.
The next quote even has a picture to go with it…this one needs no explanation.
The Federal Reserve Act does impose restrictions on what type of domestic securities the Fed may or may not buy through open market operations. These are detailed in Figure 6.
Federal Reserve Act Limitations
What if the assets in the ‘not allowed’ column were ‘allowed’, though? This point is not moot, since aggressive use of the discount window–under certain emergency provisions in the Federal Reserve Act–can allow the Fed to sidestep, to some extent, the restrictions which apply to open market operations.
Even if the legal constraints were not present, however, it’s not necessarily desirable to have the Fed acting in markets for corporate debt or mortgages. Whatever benefits there might be from such actions would have to be weighed against the cost of putting the Fed in the business of allocating private sector credit–a task for which the Fed has no particular expertise, and which would likely subject the Fed to unwelcome political pressures.
Technically, we don’t have the power to do what we want, however, desperate times call for desperate measures. We make the money and you better damn well believe we can make the rules too. To add fuel to the fire, since we don’t know what the fuck we’re really doing, we will simply use Enron’s fraud strategy as our basis for perpetrating these rule changes and the public will be none the wiser. (Read up on Maiden Lane LLC 1,2, and 3) We could, however, find ourselves angering the proletariat and that could lead to pitchforks and torches.
If standard policy options are exhausted, the Fed’s quiver is by no means empty. But the arrows that remain are less familiar and, perhaps, not quite as straight as the ones that have already been fired.
If we run out of options, we’ll just change the rules to give us more options. Who cares if they are borderline illegal?
So there you have it folks. Let’s see how this saga unfolds in the coming months, years, and decades to follow.
