“I Think this Willful Ignorance Will Bring on a Banking Crisis”

Central Bankers are ignoring the failure of Negative Interest Rates.

By Christine Hughes, Chief Investment Strategist at OtterWood Capital:

Central Bankers are willfully ignoring signs that negative interest rates are not working, explains Christine Hughes in the video. As yields fall to the floor, people have to save more to make up for the lack of interest income they’d been counting on. Bank stocks loathe negative rates, and banks are actively looking for other options. In the end, she says, negative rates will bring on a banking crisis. Excellent brief video on the NIRP absurdity:

Friday was also the Worst Day for Italian and Spanish stocks, which plunged over 12%. And banks were massacred. Read…  Brexit Blowback Hits Italian and Spanish Banks

Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I immensely appreciate it. Click on the beer mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.


  35 comments for ““I Think this Willful Ignorance Will Bring on a Banking Crisis”

  1. Troy Ounce
    Jun 26, 2016 at 11:18 am

    They can piss of people and discourage them to hold deposits at the bank.

    What they cannot do (and I am sure that was the intention of NIRP) is for the same people to start spending.

    Why oh why does reality not fit into their Keynesian models?

    • Boatwright
      Jun 26, 2016 at 11:47 am

      These folks are in fact the antithesis of Keynesian. Gold-bug fantasies are not the answer either.

      • Troyounce
        Jun 26, 2016 at 12:59 pm

        At the end, after Keynesians have tried for the 1000th time to come up with a solution to solve a debt problem with more debt, gold will reign supreme.

        Death, taxes and Keynesian policy failures.

        Can’t wait!

        • Jun 26, 2016 at 3:26 pm

          RE: At the end, after Keynesians have tried for the 1000th time to come up with a solution to solve a debt problem with more debt, gold will reign supreme.

          Before we assign too much blame or credit to the Keynesians, it is well to consider that two of their major assumptions are no longer correct due to the profound changes in the socioeconomy, thus the conclusions and recommendations based on these assumptions are now incorrect. We are in a rapidly mutating new socioeconomic epoch, and none of the old ‘isms/models are valid.

          * “Consumption” no longer significantly stimulates domestic production and production based economic activity, largely because the industrial/manufacturing plants have been “off-shored,” or increasingly it has been automated to the degree that even large increases in production no longer require significant numbers of new employees. In other words the variable cost of employment has been converted to the fixed cost of automated machines and equipment.

          * It has never been correct that “government” would reduce their spending and increase taxes in the “boom” periods both to amortize debt contracted during the “bust” periods, and to avoid competing with the private sector for manpower, material, and capital.

  2. Boatwright
    Jun 26, 2016 at 11:39 am

    It seems that the austerity cure, just like blood-letting, is well on the way to killing the patient. In today’s post Keynesian world, responding to debt deflation and the failure of demand in the economy, our economic and political leaders find it unthinkable that government deficits are the only way to restore balance in the economy. Rather than allowing the natural and healthy growth of deficits in the public sector during a deflation/recession these same fools would rather watch the patient bleed and die, with the hope that another round of lancing in the form of negative rates will do the trick of restoring demand.

    It will not. What it will do is create a world of unemployment and hording.

    • nick kelly
      Jun 26, 2016 at 3:30 pm

      Since there seems to be the usual commentary from people who don’t know what Keynes said, here it is:

      His experience had been with Depression, in which governments slashed spending as tax revenue fell, making the economy contract more, making tax revenue fall, requiring more reduction in spending as the government tried to balance its budget…
      The negative feedback cycle which amplifies itself.

      So Keynes advocated the government running a COUNTER CYCLIC budget, to spend in recessions and to run a SURPLUS in good times. Something like a two- cylinder motor, when one piston is going down the other is going up- smoothing the action.
      In a sense the good old Bible story- seven years of fat seven years of lean but grain stored during the fat years.
      Keynes believe it or not, advocated balanced budgets, but balanced at the end of the cycle, not year end.

      But his whole perspective was the Depression. The government hadn’t stored grain, which at that time was gold or gold- redeemable paper money. So how can the cycle start, or does a Depression go on for ever?
      No- the government could debit its books, (deficit finance!) and issue money, ‘priming the pump’
      This credit or money is not manna from heaven it is borrowed from the economy’s recovery.
      Nothing wrong with this- but unfortunately politicians or if you like the greed of the public got hold of it. Turns out, they loved the spend part but not the surplus part, and if you can run a debit to prime the pump, why not run it all the time and have whatever the pump delivered plus the prime.
      Who will be elected, the politician promising stuff now, or some guy who wants to save for a downturn?

      Oddly- Keynes is an unusual figure who is misinterpreted by left and right.
      The left ( what I would call the loony left) thinks the government should just print whatever money we all need and they have the gall to invoke Keynes as their authority.
      The right points to the insane and growing level of government debt and ALSO names Keynes- except now instead of a prophet, he’s the devil.

      • Boatwright
        Jun 26, 2016 at 4:28 pm

        Thanks for the contribution on the much misunderstood work of JMK.

        I would however make a further point: For those countries with large economies that can issue sovereign currency and withdraw same from circulation through taxes, there is a difference between a government deficit and a debt. When the US issues a T-Bill, it is not the same as you or I borrowing money to buy a house or a car.

        As counter to “common sense” as it may seem, the government budget is not in any way the same as one’s household finances. During a recession, there will always be a deficit and any attempt to eliminate the deficit through fiscal austerity, returning to a hard money system, etc.. will inevitably lead to further economic contraction and a deepening recession.

        I suggest reading Warren Mosler for an illuminating explanation of how government deficits and surpluses actually function in a sovereign economy.


      • chris Hauser
        Jun 27, 2016 at 9:31 pm

        smart guy, keynes. mechanical solutions are for mechanical problems. keynes posited an artistic and a mechanical solution, that was appropriate for the time.

        it’s called arts and sciences. hard to think such thoughts amidst blather.

        but that’s what the world is, blather. and then one focuses, and blather falls away.

        am i being obscure?

  3. Jun 26, 2016 at 11:50 am

    IMNHO “denial,” in the abnormal psychological sense, may be a more appropriate word choice than “willful ignorance.”

    A major contributing factor appears to be the over-abstraction of the goals and objectives of “central banking,” toxically combined with ever increasing “isolation” from the “real world” of the large majority of people, such that the true short and long term human costs of their policies to defend increasingly meaningless indici, ratios, and other metrics, are never recognized.

    Perhaps the basic problem is a lack of accountability of the central banks and bankers in meeting their mandated goals and objectives. When was the last time one of the central bankers was fired for non-performance, or an existing central bank replaced because it was no longer “fit for purpose?” Consider the possible effects of a “purge” of the Federal Reserve Banks’ “Boards of Governors,” the Chairman, and the policy making/enforcement managers, when the 2008 credit collapse occurred.

    • d'Cynic
      Jun 26, 2016 at 3:03 pm

      If I could use one word to describe the current central banking, and perhaps political establishment: incestuous inbreeding.

      • Jun 26, 2016 at 3:41 pm

        RE: If I could use one word to describe the current central banking, and perhaps political establishment: incestuous inbreeding.
        May I suggest “groupthink.”


        Groupthink is a psychological phenomenon that occurs within a group of people in which the desire for harmony or conformity in the group results in an irrational or dysfunctional decision-making outcome. Group members try to minimize conflict and reach a consensus decision without critical evaluation of alternative viewpoints by actively suppressing dissenting viewpoints, and by isolating themselves from outside influences.
        Groupthink requires individuals to avoid raising controversial issues or alternative solutions, and there is loss of individual creativity, uniqueness and independent thinking. The dysfunctional group dynamics of the “ingroup” produces an “illusion of invulnerability” (an inflated certainty that the right decision has been made). Thus the “ingroup” significantly overrates its own abilities in decision-making and significantly underrates the abilities of its opponents (the “outgroup”). Furthermore, groupthink can produce dehumanizing actions against the “outgroup”.

        also see

    • chris Hauser
      Jun 27, 2016 at 9:34 pm

      we have met the enemy, and he is us. we are all part and parcel.

      now, how to get out of our own way, en masse.

      some will get stepped on, some will step in it, etc etc.

  4. Jun 26, 2016 at 11:58 am

    I think the Zero interest rate game was primarily to get people to spend money. Japan chronic savers, then Zero and even neg. rates, and people are so scared they will not spend. In my lifetime I remember nearly 20% on Gov. bonds, my parents and my wife’s parents have piles of bonds many inches thick, in boxes. They recognized a great deal, once in a lifetime – better than Sham-WOW, the Orange no-stick fry pan, and even no fat yogurt. I don’t have bank accounts any more, forget the .4% interest…. how about the $250. + yearly in fees….? I think the ekinime sucks so bad they are trying everything to get people to spend everything they get way before they get it. No wonder no one has $500. for an emergency.

    So what would a quick reversal do ? what would happen if all these ZIRP and NIRP’ers went right into a 2% min….? all of them, almost overnight no carry games, etc……

    Anyway, the video shows Z, and N, cause hording, did they not see this coming as rates began to drop over the years…? How did they think Z and N would benefit anyone ? it in no way has encouraged business to invest, this should have been it’s main goal…. but squat…

    I quit…….

    • chris Hauser
      Jun 27, 2016 at 9:35 pm

      fighting deflation causes deflation. oh my, what to do.

  5. William
    Jun 26, 2016 at 12:22 pm

    “Bigger real estate bubble” is what I am hoping will follow.

    • chris Hauser
      Jun 27, 2016 at 9:38 pm

      slow inflation with moderating credit standards will stretch and solidify the bubble sphere, except where there are no “jobs.” or “wealth.”

  6. OutLookingIn
    Jun 26, 2016 at 1:18 pm

    The central bankers of the world are now sitting at the feasting table, about to consume their banquet of consequences.
    Their Keynesian financial models are linear and believe in an economic equilibrium state as being the norm. This has proven to be false, time and time again. Yet they still carry this insanity to ever greater heights of madness.

    Unfortunately, after the banquet has ended the true victims of their false belief folly, will be everyone in the world who depends on this faith based financial falsehood. Which the bankers continue to experiment with, using ever more astounding levels of the same insanity.

    Eventually this failed central banking economic modeling will collapse. This fact is known to all, even by some bankers! The only question being is the matter of timing. I have this foreboding feeling that time has become very short.

    • Boatwright
      Jun 26, 2016 at 4:41 pm

      “Their Keynesian financial models are linear and believe in an economic equilibrium state as being the norm.”

      Samuelson, et al are known as neo-Keynesians. I believe that JMK himself would find many of their ideas, including the “equilibrium state as being the norm” are not his at all.

  7. TroyOunce
    Jun 26, 2016 at 1:29 pm

    The Global Economy Cannot Longer Rely On Debt – BIS.

    They figured it out!

  8. i1
    Jun 26, 2016 at 3:39 pm

    She’s starting to get the gold thing, tethered to inflation though her concept may be. Negative growth begets negative interest which in turn vaporizes most “productive” assets thus initiating deflation and a demand for dollars.
    Gold’s attraction is zero counter party risk, unless that party has a gun.

    I finally watched “The Big Short” today, Brad Pitt’s doomer Yoda character Ben Rickett was good, although the script not quite cynical enough for my taste. I am sure they’ll write a sequel.

  9. Thomas Malthus
    Jun 26, 2016 at 4:13 pm

    Paying people to take loans – charging them to save.

    ‘Insane… yes… clearly insane’ (Apocalypse Now)

    But why? Why would the men who control the world (the owners of the Fed) blow up their own house?

    What do they fear?

    Let’s face it. This is the end of growth.

    It is after all a finite world — and a system that required infinite growth — well that was destined to fail.

    These ‘insane’ policies are the Fed’s reaction to the end of growth.

    They are like rats backed into a corner by a pack of hungry ferocious cats…. they are desperate…. they will do anything … anything at all … that keeps those cats at bay for as long as possible…

    But the cats will of course ultimately kill them (and all of us)

    This is well and truly the end of days.

    • Jun 27, 2016 at 3:24 pm

      RE: …This is well and truly the end of days.

      While this may indeed be the “end of days” for the current capo/casino/crony perversion of capitalism, something new, and quite possibly better aligned with the new reality of globalization and supranational corporatism, will arise to replace it. The same lament was made when agriculture was replacing hunting/gathering, nationalist mercantilism was replacing manorialism/feudalism, capitalism was replacing mercantilism, etc.

      • Thomas Malthus
        Jun 27, 2016 at 3:29 pm

        When I say end of days hyperbole is not intended… I well and truly mean the end of days…

        THE PERFECT STORM (see p. 58 onwards)

        The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy.

        But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.


  10. John Doyle
    Jun 26, 2016 at 4:30 pm

    What Christine is saying in effect is describing the disconnect between the real [energy] economy and the financial economy. There is not enough growth in the energy economy to feed the financial economy. This is the way of the future, in perpetuo from now. I hope someone in authority is making plans to cope,but I see no signs.

    • Thomas Malthus
      Jun 26, 2016 at 7:41 pm


      Tim Morgan does a good job of explaining this phenomenon:


    • Jun 27, 2016 at 3:51 pm

      RE: What Christine is saying in effect is describing the disconnect between the real [energy] economy and the financial economy. There is not enough growth in the energy economy to feed the financial economy. This is the way of the future, in perpetuo from now. ==>I hope someone in authority is making plans to cope,but I see no signs.98% of their nuclear power) from the obsolescent PW reactors with minimal reprocessing, and operate at a much higher temperature [c. 700C] allowing easy retrofit to existing coal/NG fueled generating stations.

      Given the increasing drought in SW United States/Northern Mexico, South America, Africa and the Mid-East the cheap power provided by MS nuclear will be critical to power the required desalinization plants and pumping stations if famine and massive unrest/migration is to be avoided.

      There is more than ample energy available, and the technology exists. What is lacking is the will to do so.

      For more information see

      • John Doyle
        Jun 27, 2016 at 6:17 pm

        Nuclear power, Eh? I’ll leave comment to “Thomas Malthus” on that issue.
        Personally I think you are dreaming if you believe we can make it work.

  11. sinbad
    Jun 26, 2016 at 6:47 pm

    Money is an IOU issued by a Government, it’s supposed to facilitate trade.

    When the US broke the Bretton Woods agreement, the collapse of the major unbacked currencies was inevitable.

    Some countries have been stockpiling gold, in the near future, we will see which countries can back their currencies with tangible assets, and which ones can’t.

    Is it true the US has been stockpiling silver?

    • Agnes
      Jun 27, 2016 at 3:49 am

      As a sop to the western mining states, silver was accumulated for a while. A lot of it was used in the silver eagles. When they started buying blanks outside the U.S.(against the law), the silver bugs concluded that there was none left…but my Dad and I think there are billions of ounces unaccounted for. Some of it(many millions of ounces) was used for plating flatware.

      Jun 27, 2016 at 12:02 pm

      MONEY is not an IOU. Money has real, intrinsic value due to what is used as “MONEY”, be it a metal, cows, women, obsidian, etc.

      You really mean “notes”, or “credits”. Nobody can “issue” money since nobody can issue gold or silver or copper, etc. A society, or a State, is wiling to use items of intrinsic value, which exist without the need of a society or State, as a medium of exchange, and that is real MONEY.

      A one ounce Gold Reich Mark, with a pretty portrait of Chancellor Hitler is worth today what-ever one ounce of gold is worth. Might even be worth more with his face on it. BUT, a note issue by the German Government, printed with “Ein Hundred Reich Marken” is…..worthless. The first has intrinsic value created by nature, the other is issued by a State and has no value

      Private Banks, such as the FED, or Governments, can “issue” currency, notes, greenbacks, continentals, Yen, Yaun, etc, but none of it is money.

      That is the source of the problems.

      • John Doyle
        Jun 27, 2016 at 5:27 pm

        You confuse fiat money with commodity money. there is no commodity money today. There are no asset backed currencies, not since 1971. Money,or currency, is backed only by the “full faith and credit” of the national government.
        The divergence in value is simply the rating the governments get. So you are more likely to accept German backed currency than a third world equivalent.

  12. interesting
    Jun 26, 2016 at 8:29 pm

    this is all like a bad comedy, most western nations have destroyed their middle class by exporting all the well paying jobs, real incomes haven’t grown since the 1970’s and my personal income peaked in 1997.


    it’s not rocket science, it’s just math.

    • chris Hauser
      Jun 27, 2016 at 9:40 pm

      arithmetic, actually.

  13. Meme Imfurst
    Jun 27, 2016 at 9:02 am

    You can not convince the convinced.

    As Larry Summers said ” if you are not in with us, you are on the outside” paraphrased. But the point is that they only listen to their own kind, and if you are not with them then you have no voice. All these central bank ideas and practices are ‘club and group’ approved….and it is not their money but yours they play with,so why should they care?

    Do any of you actually think they would listen to anything you have to say?

    Do you think Warren Buffett actually wants to hear your thoughts at lunch?

    Everyone knows, including all the ‘elites’ than central anything does not work because there is no diversity ( it can’t have anything to do with the fact they are all ex-Goldman). Big banks don’t offer any advantage over community banks or credit unions, unless you happen to be on salary there. The old saying ‘don’t put all your eggs in one basket” has a lot to do with all the problems in the world that are stretched to the breaking point.

    Diversity was invented by nature, centralization was invented by man and instituted by special interests.

  14. Marty Riske
    Jun 27, 2016 at 11:16 am

    The Fed tool box has a hammer and a crescent wrench. A phillips screwdriver is reqired to fix the problem but the Fed doesn’t have a screwdriver so it is using the hammer.

Comments are closed.