Few positives for negative interest rates

We investors are suffering a bizarre new phenomenon - where banks and governments are "paying" negative interest rates.

Negative rates imply that customers actually pay for keeping money in the bank or in sovereign bonds, rather than receiving interest.

Negative interest rates in countries such as Germany and Japan are an experiment to stimulate consumer spending. Just last week, Germany sold 10-year bonds yielding negative rates - investors pay the sovereign to hold these fixed-income securities!

Instead, investors and savers are hoarding cash. In Japan, sales of safes have soared.

A reader, a Wharton MBA graduate - so clearly, no slouch - sent us the following question:

"I can see why a central bank would want to set negative interest rates [it encourages big banks to lend money rather than park it], but can't understand why a customer would be willing to accept a financial instrument with a negative interest rate. If a customer cannot receive at least some positive interest, why would he not just hold cash - and stuff it in a mattress or a safe-deposit box?"

Good question. We asked Ted Aronson (also a Wharton grad) for an answer. And professional investors, it turns out, are flummoxed as well.

"Negative interest rates are a brave new world," said Aronson, founder of AJO Partners in Philadelphia. "My 1970 Samuelson economics textbook doesn't have a single mention of them."

Even during the Great Depression, banks and governments didn't venture into negative interest rates.

"There will come a point with negative interest rates when people will put cash in a safety-deposit box, or a mattress, or in a warehouse," Aronson explained. All three have costs - build or rent the warehouse; your mattress could go up in smoke during a house fire, or rent every single safety-deposit box in every bank.

If you don't see the value of paying someone to hold your money, you're not alone. We're in uncharted territory.

Debt collector loses suit

Last week, the Pennsylvania attorney general settled with an Allentown attorney who illegally used the state's filial responsibility law to intimidate family members into paying their loved ones' medical bills.

Chief Deputy Attorney General Thomas Devlin and Deputy Attorney General Patrick Greene, both of the Office of Attorney General's health-care section, handled the case against James Havassy and Hamilton Law Group P.C., based in Allentown.

The AG filed the suit in 2015, after the law firm, which specializes in debt collections, sent letters like this: "Notice is hereby given to you that a spouse, parent and child of an indigent person all have the legal responsibility to care for and maintain or financially assist them. Therefore, in accordance with the Filial Responsibility Law, as we can prove that the debts of your relative were not timely paid as they became due, you are fully responsible for this debt."

Not so fast, said the AG's Office.

The settlement requires Havassy and his law group to pay restitution. If you received such a notice, contact the Office of Attorney General within 90 days at 877-888-4877 or online at www.attorneygeneral.gov.

The suit started after Pennsylvania consumers complained that Havassy and his law group were hired to collect medical debts by health-care providers in Lehigh and Northampton Counties. He declined to comment for this story.

One woman received collection notices for an anesthesia bill owed by her adult son, who had his own health insurance. Another man was pursued for the cost of his mother's and adult sister's dental services. Yet another was pursued for his father's debt to a cardiologist. Two of the people claimed their credit profiles were "negatively marked."

Havassy misled consumers by citing the filial responsibility law that makes certain family members responsible for their indigent relatives' long-term medical costs.

But payment requires a court determination and an order of filial support, the Attorney General's Office said in a statement.

The office found the alleged conduct of Havassy and his law group violated the Unfair Trade Practices and Consumer Protection Law and the Fair Credit Extension Uniformity Act.

The filial responsibility law doesn't always make parents and their children responsible for each other's debts. The debtor must be indigent and the person targeted for payment must have the ability to pay. That was the key in the case against Havassy.


215-854-2808 @erinarvedlund