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The False Promise of Negative Interest Rates

LONDON – As a biographer and aficionado of John Maynard Keynes, I am sometimes asked: “What would Keynes think about negative interest rates?”

It’s a good question, one that recalls a passage in Keynes’s General Theory in which he notes that if the government can’t think of anything more sensible to do to cure unemployment (say, building houses), burying bottles filled with bank notes and digging them up again would be better than nothing. He probably would have said the same about negative interest rates: a desperate measure by governments that can think of nothing else to do.

Negative interest rates are simply the latest fruitless effort since the 2008 global financial crisis to revive economies by monetary measures. When cutting interest rates to historically low levels failed to revive growth, central banks took to so-called quantitative easing: injecting liquidity into economies by buying long-term government and other bonds. It did some good, but mostly the sellers sat on the cash instead of spending or investing it.

Enter negative interest-rate policy. The central banks of Denmark, Sweden, Switzerland, Japan, and the eurozone have all indulged. The US Federal Reserve and the Bank of England are being tempted.