You'd think that with Deutsche Bank (DB) in trouble and with questions being raised, generally, about the solvency of the European banking system, the ECB would have second thoughts about its negative interest rate policy.
They can't seem to connect the dots. After all, negative interest rates have a negative effect on the banks because they functionally act like a tax. Banks have to pay the ECB on reserves balances. These are funds that ordinarily are a source of income for banks; however, with negative rates they are taxed instead.
Ultimately, this eats into bank earnings and bank capital, which is exactly the issue with Deutsche Bank right now, along with many other European banks. Same is true in Japan, and while there may not be a single story about any individual bank in Japan, it's pretty much known that most of the banks in Japan are "zombie" banks, meaning that they function only in a deposit and clearing capacity, as opposed to being big into making loans as was once the case.
Yet despite the problems at Deutsche and the long-time problems with the technically insolvent banks in Japan, the geniuses at the central banks continue to push this absurd notion of negative interest rates as stimulus, which is nothing short of bizarre. When I listen to them defend this policy, I get the feeling that they feel that the negative rate, a penalty rate, will lead to banks "lending out their reserves."
The problem with this is, banks do not and cannot lend out their reserves. This is not my opinion, but rather a known fact. Apparently, central bankers do not let facts get in the way of their beliefs and it's why the thinking persists despite its deleterious effects. I guess if you "B-S" yourself enough, then you start to believe whatever it is you are saying.
In fact, the sclerotic thinking is so entrenched that you have central bankers everywhere talking about how negative rates are "working." Meanwhile, juxtaposed against this fantasy is the reality of a major, major, bank floundering, and possibly in need of a massive government bailout.
Recently, even some members of the Fed started warming to the idea of negative rates, something Fed officials hadn't been too keen on in past. Ironically, they might even get an opportunity to put it into practice, thanks to the fact that they held off on putting through their own fiscal expansion when the decided not to raise rates and given the fact that fiscal flows (Federal spending) currently are decelerating.
This slowdown could start to gain momentum, with both the Fed and fiscal authorities sitting on their hands, although there's still a chance we can be "saved" if Congress passes a continuing resolution by the end of the week that includes some additional spending. Either that or we start to see an acceleration in household sector borrowing, which is something that I have been saying could happen.
However, for the moment we remain in limbo, with the economy growing barely above stall speed and the only thing being discussed with sharpened interest is a tax masquerading as stimulus.
Deutsche going down: the new Nero fiddles while Rome burns.