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Recently Bank of Israel Governor Stanley Fisher became the first Western central banker to raise interest rates. Central Bank rates in most Western nations range from 0.25 to 1 or 2%, after banks drastically slashed rates to battle the global recession. Most of these banks are for now maintaining rates at their low levels.

But could they have reduced rates even further? Is it possible, for instance, to set a negative interest rate? In other words: I borrow $100, and at the end of the year, pay back only $99?

Of course, this has happened in the past, when real interest rates (the nominal or actual rate less inflation) were negative, because inflation exceeded nominal rates. But, can nominal rates be negative?

Writing in the Financial Times, Wolfgang Munchau points out that “the zero lower bound [of interest rates] is one of the great myths of monetary economics”. Last week, he notes, the Swedish Riksbank set a small negative deposit rate. I recalled, in reading his piece, that decades ago the Euroyen interest rate (the rate of interest paid on yen deposits held in European banks) was negative, when Japanese interest rates were about zero, mainly because banks did not want to hold such deposits and set negative rates to discourage them.

Should this be done? Can it? asks Munchau.

The answer to both is, yes. 

We teach managers to examine every single fundamental assumption inherent in their business designs. Governments and central banks should do the same, in these turbulent times. What are we assuming, they should ask, that may be wrong.

Apparently, the assumption that interest rates must be above zero is one of them.


Since I was a child, I have been myopic and won glasses. As a kid, I fought wearing glasses for years, even when I could not see the blackboard at all, for fear of being called ‘short eyes’ and worse. 

Today, I see managers doing the same. They are myopically short-sighted, cannot see the future even as it unfolds clearly, and endanger their companies, even their industries, by doing so. Today, uncorrected myopia exacts a heavy price.

The media industry is a prime example. As Andrew Edgecliffe-Johnson notes in the Monday Financial Times*, “from the morning paper to the evening news, the media industry is in crisis”. PWC says global revenues from newspapers and their digital incarnations will fall 10% this year and will shed $20 b. in revenues between 2008 and 2013. Worse than airlines!


A report notes that the media industry “has failed to make the digital transition”. News organizations’ digital revenues were only 11% of total revenues, compared with 69% for the broader information industry (e.g. including legal and financial data providers like Reed Elsevier, a publisher, and Bloomberg).

Where were the industry leaders’ glasses? Were their curtains shut hermetically? Did they notice at all what happened to the music industry, which stuck to selling CD’s when the technology dictated downloads? Did they miss successful innovators in their own industry, like the Seattle Post-Intelligencer, which shifted from newsprint to a solely digital format [see this Blog, Paradigm Shift in newspaper: Sleepless in Seattle, March 2009]?

The warnings signals were clear and powerful. Craig Newmark founded Craigslist as a service to his friends in 1995.  That was 14 years ago! Since then on-line classified advertising has exploded. Now, newspapers used to make much of their profit from their classifieds. Today, newspaper advertising, including classifieds, is down 29% in the U.S. I believe classified advertising revenues fell far more. When Craigslist appeared, did newspaper owners and managers grasp that this was a powerful paradigm shift, one they could not ignore? Why did they not see it? Did these industry leaders wait, like a condemned criminal on Death Row, for their businesses to wither and die?

A great many good people are going to lose their jobs, forever, in the media, because of the myopia of their leaders.   Perhaps we should say, as did the broadcaster in Network, “I’m mad and I’m not going to take it any more!”. If your leaders refuse to put on corrective glasses, stand up and help them see the future. Save your own job and those of your friends.
* “Sacrifices made in hunt for new model”, Financial Times, Monday Aug. 31, 2009, p. 12.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
September 2009
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