Low Interest Rates: In the black hole Savers need to be very strong now: The times of low interest rates are far from over. Not only central bankers are to blame. But there are increasing doubts whether they have the situation under control. You can not accuse Larry Summers of lacking the courage to act. During his career, with positions as Finance Minister under Bill Clinton, Barack Obama's Business Advisor and Harvard University President, his voice has always resonated well with economic debates. In 2005, even as a macho economist, he said: "It's been scientifically proven that there are fewer female geniuses than males, and that's another reason for the small numbers of women in science," he said in a speech , She is one of the reasons why Summers still teaches at Harvard today, because he is a good scientist, but no longer leads the university. Elsewhere, he remembered more substantial contributions, such as when he revived the idea in 2013 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 the 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 a picture of a situation in which the low (and sometimes even negative) interest rates of 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 As in the black hole, the known laws of nature are no longer valid.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. 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 the ECB has recently been more concerned about keeping the European economy running than being happy with 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 also 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 Mario Draghi already suggested? 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. Currently, the old dogma still holds For example, Martín Uribe, a professor at Columbia University. He published a research paper in September 2018 dealing with the so-called neo-fisher effect. Uribe asks: Why are central banks failing to bring inflation to the level that most of them are aiming for even though interest rates are already very low? Because the dogma is actually: low interest rates boost the economy, and in an economy that is running well, the demand for all sorts of goods increases, which in turn causes prices to rise. Uribe not only questions this mechanism. He even comes to the conclusion that it can be the other way around. Lower interest rates, if people think they are sustainable, can even keep inflation from falling instead of rising. The exact reasoning behind it is complicated. But Uribe tests his thesis with all sorts of data. And concludes that there could be another solution to this phase, in which hardly any central bank reaches its inflation targets: raising its key interest rates. Whose head is buzzing now, because in monetary policy, apparently, a dogma and its opposite can apply, which is not alone. The central bankers world, which suspects that their theories also have a lot of voodoo and are outdated every few decades, is also unsettled. Likewise, the surrounding economist's bubble. At the moment, however, the old dogma still holds. At least in the sense that no influential economist has ever demanded that interest rates should be bravely upgraded. Even Summers, whose reasoning is different from Uribe's, but produces similar conclusions, does not dare. Too great is the worry that it will plunge the economy into a deep crisis. But at the annual FedBullen class reunion last week in the US, uncertainty surfaced on almost every podium. The US central bank chief Jerome Powell initially did not speak directly of doubts. But he announced that the central bank would like to look at and reassess all of its previous measures for the first time, together with the consideration of whether further, new methods will be needed soon. At present, there are currently only two directions for monetary policy, which are diametrically different: Either you continue to hang on the old dogma. Then, the current situation means that you should really strike in the next recession. That could be big buying programs again, maybe even the purchase of stocks or the so-called helicopter money, where the money is spent by the central bank directly to the citizens, as if they throw it out of the helicopter. Or you doubt the old dogma. You do not have to reject it right away. It could be plausible that it is still weakened, but the negative side effects outweigh the meantime. Then at least it would be time for restraint on the part of the central bank. There are good reasons to suspect the latter for Europe. For example, there have long been price bubbles in Germany on real estate markets in major cities, promoted by cheap loans. Banks groan under the negative interest rates. The time when the ECB seemingly almightily steered the economy through the crises seems to be over. One can therefore only recommend her to hold back. Larry Summers even demands of the central banks an "admission of powerlessness". This is not meant to be evil, but to incite the government politicians really to finally think again, what they can do for their economy. Who knows what it is good for. -- Stephanie Schmitt-Grohé Department of Economics Columbia University 420 West 118th Street MC 3308 New York NY 10027 http://www.columbia.edu/~ss3501/