Taking the long view on Wall Street
Noah Smith


NEW YORK â€" In the celebrated sci-fi comedy "The Hitchhiker's Guide to the Galaxy," a supercomputer determines that the answer to life, the Universe, and everything is the number 42. The really difficult task, however, is figuring out what the question was in the first place.

Sometimes I feel like interest rate hikes are a little like that. There is a legion of economists, commentators, government officials and businesspeople who are constantly calling on the Federal Reserve to end its zero interest rate policy, or ZIRP. Whether the problem is the threat of inflation, or excessive risk-taking in search of higher returns, or the idea that low rates hurt savers, rate hikes are the answer. Rate-hike-ism is a hammer, forever in search of a nail.

This has led a number of commentators to go "meta" in their thoughts about interest rates. Instead of asking whether we should raise rates, they are asking why some people so consistently yearn for the Fed to tighten. Since some of the loudest grumbling about ZIRP tends to come from the financial industry, much thought has gone into the question of why Wall Street hates easy money.

Recently, some commentators say they believe that they have hit upon the answer â€" it's all about net interest margins, or the spread between a bank's borrowing costs and lending rates. When this difference narrows, bank profits get squeezed. John Carney of the Wall Street Journal asserts that ZIRP is compressing that spread:

"The primary driver of falling net-interest income has been a squeeze on net-interest margins...The unusually long period of ultralow rates has compressed margins by more than 27% since 2010."

Paul Krugman concurs, and goes even further, suggesting that a small group of very influential banks is behind much of the anti-Fed sentiment. He writes:

"Commercial bankers really dislike a very low interest rate environment, because it's hard for them to make profits: there's a lower bound on the interest rates they can offer, and if lending rates are low that compresses their spread. So bankers keep demanding higher rates, and inventing stories about why that would make sense despite low inflation...So the demand for higher rates is coming from a narrow business interest group."

Krugman's general model of political economy â€" that narrow interests wield enormous clout on single issues â€" might be a good one, but in this case, I am not sure that he and the other commentators have the story right. The idea that a low federal funds rate compresses net interest margins doesn't make much sense to me, and I don't see a lot of data bearing it out.

First of all, if we simply look at the history of interest rates and net interest margins, we don't see much of a relationship at all:

The fed funds rate has been falling since the early 1980s, but until the mid-1990s, net interest margins actually rose. After 1994, net interest began a steady but very slow decline that continues to this day. During this whole time, the fed funds rate has gyrated dramatically, but net interest has barely budged in response to those swings. A careful time-series analysis might be able to tease out some sort of a relationship there, but I don't see it.

Then there's the lack of a good theory for why lower interest rates should compress banks' margins. Changes in the fed funds rate should affect both long-term and short-term rates equally. If the Fed tightens, depositors will demand higher deposit rates from banks, and banks will demand higher interest from borrowers. After an initial period of adjustment (to allow for existing loans to roll over), the effect of rate changes on spreads shouldn't be substantial.

Now, as Krugman points out, deposit rates â€" like the federal funds rate â€" are stuck at zero. If deposit rates stay at zero while the returns on bank loans fall, that does indeed compress banks' margins. But it's very hard to see how Fed tightening would help that situation at all. As David Henry of Reuters points out, that would just increase banks' costs in the short run. On top of that, if rate hikes slow economic growth â€" as they did in the early 1980s â€" that will hurt banks' profits even more.

If banks really do think that Fed tightening would boost their bottom lines, history is not on their side. When Japan temporarily ended its own ZIRP in 2006, the result was simply higher costs for banks, with no corresponding rise in profits.

So if we want to find the reason that Wall Street wants higher interest rates, we should probably look elsewhere. Here's a thought: perhaps high rates make it easier to charge bigger percentage fees at every stage of the investment process. But that's a topic for another column.

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A tribute to the 30,000 Iranian political prisoners murdered in Iran in 1988

Anne-Sophie Goninet, Hannah Steinkopf-Frank and Bertrand Hauger

👋 Laba diena!*

Welcome to Wednesday, where Afghanistan's Taliban demand to speak at the United Nations, China takes a bold ecological stand and we find out why monkeys kept their tails and humans didn't. Business magazine America Economia also looks at how Latin American countries are looking to attract a new generation of freelancers known as "digital nomads" in the wake of the COVID-19 pandemic.



• Taliban ask to speak at UN: With global leaders gathered in New York for the 76th meeting of the UN General Assembly, Afghanistan's new rulers say their country's previously accredited United Nations ambassador no longer represents the country, and have demanded a new Taliban envoy speak instead. Afghanistan is scheduled to give the final intervention next Monday to the General Assembly, and a UN committee must now rule who can speak.

• Four corpses found on Belarus border with Poland: The discovery of bodies of four people on Belarus-Poland border who appear to have died from hypothermia are raising new accusations that Belarus is pushing migrants to the eastern border of the European Union, possibly in retaliation over Western sanctions following the contested reelection of the country's strongman Alexander Lukashenko. The discovery comes amid a surge of largely Afghani and Iraqi migrants attempting to enter Poland in recent weeks.

• China to stop building coal-burning power plants abroad: Under pressure to limit emissions to meet Paris climate agreement goals, China announces an end to funding future projects in Indonesia, Vietnam and other countries through its Belt and Road initiative.

• Turkey ratifies Paris climate agreement: Following a year of wildfires and flash floods, President Recep Tayyip Erdogan announced at the UN that Turkey will become the last G-20 country to ratify the emissions-limiting accords. Turkey already signed the agreement in 2016, but has yet to hold a vote in parliament.

• Mass evacuations following Canary Islands volcano: More than 6,000 people have fled the Spanish archipelago as heavy flows of lava have buried hundreds of homes. Four earthquakes have also hit the Canaries since the Sunday eruption, which could also cause other explosions and the release of toxic gas.

• Rare earthquake hits Melbourne: The 5.9 magnitude quake struck near Melbourne in southern Australia, with aftershocks going as far Adelaide, Canberra and Launceston. Videos shared on social media show at least one damaged building, with power lines disrupted in Australia's second largest city. No injuries have been reported.

• The evolutionary tale of tails: Charles Darwin first discovered that humans evolved to lose this biological trait. But only now are New York scientists showing that it was a single genetic tweak that could have caused this shift, while our monkey relatives kept their backside appendages.


"The roof of Barcelona" — El Periodico daily reports on the latest delay from what may be the longest-running construction project in the world. Work on the iconic Barcelona church La Sagrada Familia, which began all the way back in 1882 as the vision of master architect Antoni Gaudí, was slated to be completed in 2026. The Barcelona-based daily reports that a press conference Tuesday confirmed that the deadline won't be met, in part because of delays related to COVID-19. Officials also provided new details about the impending completion of the Mare de Déu tower (tower of the Virgin), the first tower of the temple to be completed in 44 years. Although it is currently the second tallest spire of the complex, it will become the highest point of the Sagrada Familia, reaching 172.5 meters thanks to an illuminated "great cross."


Latin America, the next mecca for digital nomads

Latin American countries want to cash in on the post-pandemic changes to the fundamental ways we work and live, in particular by capitalizing on a growing demand from the new wave of remote workers and "youngish" professional freelancers with money to spend, reports Natalia Vera Ramírez in business magazine America Economia.

💻🏖️ Niels Olson, Ecuador's tourism minister, is working hard to bring "digital nomads" to his country. He believes that attracting this new generation of freelancers who can work from anywhere for extended visits is a unique opportunity for all. Living in a town like Puerto López, he wrote on Twitter, the expat freelancer could "work by the sea, live with a mostly vaccinated population, in the same time zone, (enjoy) an excellent climate, and eat fresh seafood." For Ecuador, the new influx of visitors with money to spend would help boost the country's economy.

🧳 While online-based freelancers already hopped from country to country before COVID-19, the pandemic has boosted their current numbers to around 100 million worldwide. The Inter-American Development Bank estimates there could be a billion roaming, digital workers by 2050. Some European countries already issue visas for digital nomads. They include Germany, Portugal, Iceland, Croatia, Estonia and the Czech Republic, but in the Americas, only four countries make the list, namely Antigua and Barbuda, Barbados, Panama and Costa Rica.

💰 In August 2021, Costa Rica approved a law for remote workers and international service providers, intended to attract digital nomads and make its travel sector more competitive. The law provides legal guarantees and specific tax exemptions for remote workers choosing to make the country their place of work. It allows foreign nationals earning more than $3,000 a month to stay for up to a year in the country, with the ability to renew their visa for an additional year. If applicants are a family, the income requisite rises to $5,000.

➡️ Read more on Worldcrunch.com


$2.1 billion

Google announced yesterday it will spend $2.1 billion to buy a sprawling Manhattan office building, in one of the largest sales of a building in U.S. history. The tech giant plans on growing its New York workforce to more than 14,000 people.


It is sickening and shameful to see this kind of president give such a lie-filled speech on the international stage.

— Opposition Brazilian congresswoman Vivi Reis in response to President Jair Bolsonaro's inflammatory 12-minute speech at the UN General Assembly. The unvaccinated head of state touted untested COVID-19 cures, criticized public health measures and boasted that the South American country's environmental protections were the best in the world.

✍️ Newsletter by Anne-Sophie Goninet, Hannah Steinkopf-Frank & Bertrand Hauger

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