Larry Summers Dumps on Jackson Hole Avoidance of Negative Interest Rates

Former Treasury secretary thinks less-than-zero rates do little good and much harm.

No stranger to sharp-edged opinions, economist Lawrence Summers chided central bank leaders at the Jackson Hole confab for not tackling negative interest rates, which he thinks are an abomination.

In a series of 28 tweets, as world economic leaders gathered at the Wyoming retreat, the Harvard economics professor and former Treasury secretary laid out the case against negative rates. In his view, the practice fails to enhance demand or push economies forward.

In one missive, Summers declared: “Black hole monetary economics—interest rates stuck at zero with no real prospect of escape—is now the confident market expectation in Europe & Japan, with essentially zero or negative yields over a generation. The United States is only one recession away from joining them.”

Negative rates, where depositors pay the bank to house their money rather than receiving interest, are meant to spur businesses and consumers into spending that money instead, or putting it to use getting higher returns in riskier investments that enhance economic growth. A complementary goal is to push banks into doling out more loans.

Alas, negative rates haven’t been the stimulus that many hoped for. And they have chased capital out of Europe to the US, where investors can get better returns on Treasury bonds.

Summers expressed hope that the Jackson Hole conclave, sponsored by the Kansas City Federal Reserve Bank, would chew over the topic. “But we are not holding our breath,” he added. Sure enough, the issue was of little note at Jackson Hole, which was more consumed with the US-China trade war—plus when and how much the Federal Reserve might lower rates.

Summers has an upcoming paper arguing that low rates are of little use. “Interest rate cuts, even if feasible, may be at best only weakly effective at stimulating aggregate demand and at worst counterproductive,” Summers wrote. He warned that they lead to financial bubbles and poorly run businesses, which easy credit props up.

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