With interest rates just about as close to zero as possible, is it possible that the Fed will continue to find ways to push interest rates below zero using oh-so-clever financial maneuverings? In the New York Times, Harvard economist (and former Bush Administration adviser) Gregory Mankiw argues in favor of sub-zero interest rates. Of course, even Mankiw concedes that setting a negative interest rate target all by itself wouldn't make any sense:

"So why shouldn’t the Fed just keep cutting interest rates? Why not lower the target interest rate to, say, negative 3 percent? At that interest rate, you could borrow and spend $100 and repay $97 next year. This opportunity would surely generate more borrowing and aggregate demand. The problem with negative interest rates, however, is quickly apparent: nobody would lend on those terms. Rather than giving your money to a borrower who promises a negative return, it would be better to stick the cash in your mattress. Because holding money promises a return of exactly zero, lenders cannot offer less."

One solution, though, is to make holding money less attractive - such that borrowers might actually accept a rate of, say, negative 3 percent:

"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. 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."

According to Mankiw, there are other ways to get to a negative interest rate -- such as by embracing inflation as an official Central Bank policy. But what does it say about the current health of our financial and economic system that we are even debating the validity of such unproven, untested and, well, unfathomable ideas? Isn't this type of financial engineering what got us into our current trouble in the first place?

[image: Harvard economist Gregory Mankiw]