Sunday, April 19, 2009
N. Gregory Mankiw is a professor of economics at Harvard
Which leads one to wonder why he would put his name on a hairball idea like this one suggested to him by a clever student. Mr. Mankiw is writing about the possibility of the Fed using negative rates, something that doesn't work because no one will lend money if they are guaranteed a loss. The student's clever idea
And the other thing about Mr. Mankiw you should know. He was an adviser to President George W. Bush.
Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.Since most of us have our money in accounts of some kind and not in currency, we would suffer no loss. What this would do is rip the last vestiges of wealth from the poorest elements of society who do tend to keep such assets as they have in currency.
That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.
And the other thing about Mr. Mankiw you should know. He was an adviser to President George W. Bush.
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