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Business/Finance See other Business/Finance Articles Title: Central Bank Medicine Now Actually Making ‘Patients’ Sicker Central Bank Medicine Now Actually Making ‘Patients’ Sicker Mike Larson | Friday, February 12, 2016 at 4:20 pm Every doctor in the world knows it: Too much medicine makes patients sicker, not better. But the world’s central bankers have been ignoring that principle. They’ve been cutting rates deeper and deeper into negative territory. And now, not only is that strategy failing to HELP the economy or the markets, it’s actually HURTING them. That’s the crux of this fantastic Wall Street Journal story. It zeroes in on the problem by saying: “Those (negative interest rate) policies, which charge lenders for reserves they keep on deposit with central banks, are crimping lenders’ profits and amplifying fears of a wide economic slowdown. At the heart of the concerns is an alarming conundrum: While hobbled banks may not be able to tolerate rates this low, limping economies may not be able to tolerate them any higher.” So how can negative interest-rate policy, or “NIRP,” hurt rather than help? Well, banks make money in a lot of ways – by selling financial advice, charging fees for safe deposit boxes, taking commissions on mutual-fund or insurance-policy sales, and so on. But their core business is to borrow money from depositors and the bond market at low, short-term rates … and lend it out at higher, longer-term rates to borrowers of all shapes and sizes. The larger the difference between those rates, the more profitable banks become, and vice versa. The technical term for that spread is “net interest margin.” Global central bank action has left many investors feeling the pain. The problem is that the ongoing, massive waves of QE and NIRP from every corner of the central-banking world are crushing margins. They’re driving longer-term rates lower and lower, and causing key spreads to collapse to multi-year lows. Take the 2-10 spread I’ve talked about before here in Money and Markets. It just collapsed to 98 basis points, or 0.98 percentage points. That’s the lowest going all the way back to December 2007. It’s not a perfect proxy for core banking profitability, but it gives you the general idea. I’m not the only one warning about the toxic side effects of NIRP, either. The bond-fund giant Pimco just weighed in with its own. And David Kelly of JPMorgan Funds told CNBC this morning: “It’s an absolutely ridiculous policy … At some stage, the medicine becomes poison.” “The problem is that the ongoing, massive waves of QE and NIRP.” So what does this policy problem mean for markets and your wealth? I started saying months ago that central bankers were starting to lose control of the markets — in China, in Europe, in Japan, and here in the U.S. I said their policies weren’t doing squat for the real economy, even as they were puffing up asset prices. But now, we’re in a whole new regime. Untested, radical monetary policies are no longer just failing to help economic and market “patients.” They’re making them even sicker. That’s a confidence killer. It’s further undermining trust in central bankers on Wall Street. And it underscores how you really have to take matters into your own hands when it comes to protecting and building your wealth. So continue to stay dialed in to Money and Markets for guidance in these incredibly turbulent times. The Dow jumped more than 300 some points today as the selling pressure temporarily eased. But the underlying problems we’re facing — including the perverse threat of NIRP — haven’t gone away. My advice: Stay cautious That’s my take anyway. What’s yours? Is the failure of NIRP a problem for stocks and risky bonds? Will it continue to hollow out the banking sector, and thereby hurt markets and the economy? Is there a better alternative to NIRP for central bankers or fiscal policymakers? Make sure you take a minute to share your ideas in our comment section. Poster Comment: Don't drink the Kool-Aid. Post Comment Private Reply Ignore Thread
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