In the black hole | TIME ONLINE


You can not accuse Larry Summers of lacking the courage to act.
      During his career with stations as Finance Minister under Bill Clinton.
      Barack Obama's economic adviser and president of Harvard University gave his vote
      always to listen well to economic debates. In 2005, he even worked as a macho economist
      let it be known: it has been scientifically proven that there are fewer female geniuses than
      male, even that is one reason for the low number of women in science, said
      he then in a speech. It's one of the reasons why Summers is still in Harvard today
      teaches because he is a good scientist but no longer leads the university.
      Otherwise, he stayed with more substantial contributions in memory, such as when in 2013 the
      Idea revived that the economy could be in secular stagnation,
      in a situation where more is saved than invested.

Now, Summers has come to the forefront of a movement that questions something that has been considered almost untouchable since the onset of the financial crisis: the power and wisdom of central banks, Savers in Germany should be interested. Because it's about something to Summers, which they complain loudly: low interest rates.

Summers, together with economist Anna Stansbury, argues that Japan and Europe are in a "black hole of money." This is an image for a situation where the low (and sometimes even negative) interest the central banks no longer work properly. As in the black hole, the known laws of nature are no longer valid. Others have hinted that there might be something to that thesis, even the President of the European Central Bank, Mario Draghi. But Summers and Stansbury go further than he does when he's in doubt. In an essay titled
Where to, central banks?
They question a doctrine that every aspiring economist learns about monetary policy, a kind of natural law of central banks. It reads as follows: If a central bank lowers the key interest rate, this leads to the banks getting cheaper money, which they can also lend more favorably. So lending becomes cheaper, which leads to more investment and economic activity; the economy is stimulated. Because they trust this tenet, central bankers have so far lowered interest rates in bad times, such as downturns or crises. They want to revive the economy. In good times, they raise interest rates to prevent exaggerations and price bubbles.

Interest rates of the European Central Bank

Sources: Consensus Economics, Deutsche Bundesbank,, Thomson Reuters © TIME graphics

Now Summers and Stansbury write: "There are good reasons to believe that the ability to lower interest rates to stimulate the economy has weakened – or even reversed." This means that if the central bank lowers interest rates, it can either stimulate economic activity less than it once did. Or – and here it gets exciting – it even does the opposite. In other words, if it lowers interest rates now, it will even slow down the economy.

Can this be?

If it's true, that has consequences for every single saver. Many of them are currently observing that their money is paying little or no interest, say, on the overnight money account. If they want to save on government bonds as they did a few years ago, they will even pay with negative interest rates. Other investment alternatives such as real estate or stocks have meanwhile run quite hot, so they are at least associated with high risks. Some investors are angry. Others, if they are knowledgeable, can explain the situation so far that it is the ECB The last thing that was more important was to keep the European economy running, to make it easier for savers. You can understand that, though some people do not approve.

But if the new doubters are right, then there is a revolutionary different picture for the investors: The low interest rates, under which they suffer and which are at least partly influenced by the central bank policy, have become meaningless. Do the skeptics right, then the question arises: why soon again lower interest rates or purchase programs – as of Mario Draghi already hinted? Why not just leave everything as it is instead?

Summers is indeed the first economist who expresses his doubts about the previous procedure so loud and clear. But he is not the only one. Earlier, other, lesser-known scientists who questioned monetary policy dogma came forward.

(t) Inflation (t) Interest (t) Mario Draghi (t) Bill Clinton (t) Barack Obama


Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.