I read an article by Paul Krugman today.  It mentions how Fed funds rates cannot go negative, there is a supposed Zero Bound. 

I've seen this said before.  So I thought about it.
     

Some interest rates can go negative.

Banks borrow normally from the Fed at say 2%. That means they have to pay back $102 for every $100. And they lend that out to private borrowers at some premium. But at -2% (or in the speculative Taylor notion -6%) they borrow $100 and pay back $98 ($94). Easy. They further lend out the money as needed at some margin.

Where is the problem? If you are worried about banks hoarding cash, aren't they doing that already? But if they can borrow at -2% to lend out the $100 to a real borrower, and get $102 back, then they make up to $4 by lending instead of $2 by hoarding, so they have an incentive to not hoard. And perhaps some requirements could be placed on this apparent largess from the Fed, to limit "hoardability" of Fed funds.

Negative Fed interest rates would generate a large reverse run on the bank, equivalent to ordinary monetary inflation as money poured out of the Fed and into nominally private bank hands, whether lent or not. The banks would thus have huge amounts of "deposits" and could lend at will to borrowers with good risk sheets.

Of course, the banks aren't going to lend unlimited money to private borrowers at overtly negative rates. But one could imagine a mortgage with nominal interest at 2% and the bank paying the Fed -3% which keeps the bank happy at 5% spread (as if we should keep bad banks happy!).

Apparently the real problem is that there just isn't enough sound interest in private borrowing from banks. That is, there is real risk in the economy and trying to hide that with monetary manipulations won't work forever.

The larger problem is that there are four kinds of borrowing: Consumer (credit cards, auto loans, home mortgages) and Producer (corporate bonds) are the two main kinds. And as a mix of these two, there is Government borrowing (muni bonds, Federal debt,...), which isn't really either C or P. There is yet another kind of effective borrowing, Entitlements (Social Security, some Pension plans) in which there isn't any actual principal lent out now but a contractual return is due later.

The primary difference between C and P borrowing is that P intends to increase productivity of other capital and labor, it amasses wealth over time by producing more than the interest cost. By contrast, C is exactly the opposite. While it intends to acquire goods it is a drain on the wealth amassing power (wages etc) of the borrower. It allows immediate consumption at the cost of future wealth loss.

We've seen a binge of C, G and E borrowing the first two of which have supported P borrowing to some extent but are now falling short.

BTW, I'm not in favor of negative interest rates. I think monetary inflation is theft.