Friday, 28 August 2009

Paying to put money in the bank


The Swedish, those great innovators in social engineering, are now showing the way to be different in monetary policy. The country's central bank, the Riksbank, now has a negative interest rate for bank deposits. Commercial banks are now paying for the privilege of having their money at the central bank, making it rather like a fine or tax designed to encourage them to lend it commercially instead of hoarding it.
At the Riksbank, which now has a deposit rate of minus 0.25 per cent, the most vocal advocate of the policy is deputy governor Lars Svensson, described by the Financial Times of London as "a world-renowned expert on monetary policy theory and a close associate of Ben Bernanke, chairman of the US Federal Reserve, since they worked together at Princeton University." The paper says Mervyn King, the Bank of England governor, has hinted he may follow the Swedish example as the danger of a so-called liquidity trap, where cash remains stuck in the banking system and does not filter out to the wider economy, is an increasing concern for the UK.
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