If aliens visited earth today, they might conclude that we have a very strong economy. A cursory glance at any newspaper business section or a quick listen the radio news sound bites reveal an economy boiling over with record stock market highs, soaring corporate profits, surging real estate prices and falling unemployment.

However, if you ask the world’s central bankers, both at home and abroad, the outlook is not so good.

Ben Bernanke, Chairman of the Federal Reserve (the Fed), has recently stepped out to remind everyone that now is not the time to put the breaks on stimulus. Despite positive indicators aplenty, Bernanke insists that halting its bond buying program and raising interest rates would result in disinflation, potentially sending the economy into an unrecoverable tailspin.

Bankers at the European Central Bank (ECB) are of the same mind. In fact, members of the ECB have recently claimed they are fully prepared to go negative on excess reserves. If the ECB were to go negative, lenders would be forced to pay the ECB to hold their excess reserves, which would likely stimulate lending.

At present, the ECB pays zero interest on excess reserves. The U.S. Fed still pays lenders 0.25% interest on excess reserves (IOR). News from the ECB about their readiness to go negative is significant since it is considered a risky and rare monetary policy move — thought to be a last resort to prime the economic pump.

first tuesday insight

Hopefully Europe will be the first to take the going-negative plunge. We would gladly use them as a case study to see how effective going negative would  be towards  stimulating lending.

The vast majority of end-users require purchase assist financing in order to buy real estate. The availability of these funds is the key component to real demand, which is comprised of both:

  • willingness; and
  • ability to buy.

We will never be able to tell if the willingness is there until lenders provide the ability. As of yet, it is apparent that speculators with cash in hand are driving the resurgence in real estate sales, unaffected by the credit crunch that’s got end-users upended.

Related article:

The speculator’s predicament: a likely scenario

Soon speculators will self-destruct. It’s axiomatic since they operate on bubble logic, where profits come at the price of their inevitable demise — someone is always left holding the hot potato, and that someone is going to get scalded, badly.

Bernanke would do best to go negative as well, preferably just at the time the current mini-bubble in real estate prices bursts. Then perhaps we can get the virtuous cycle of end-user demand rolling for the first time since 2008.

Once this occurs, the optimism the popular media is trumpeting will be factually based and justified.

Related article:

Going negative for growth

Re: “Bernanke warning that now is not the time to end stimulus reignites stock rally” from the Washington Post and “Europe could drop interest rate below zero on excess bank deposits” from the LA Times