Consider the profitable bank that 'makes the market' for a risk adjusted class of liquidity suppliers an demanders. It extracts a net stream for positive market moves on the margin called proprietary trading profits.
The bank carries market making risk, which will go negative, at times, in a profitable bank. The bank thus owns long term, safe bonds with lower but more stable returns. Enough safe returns to cover the negative excursions in the market making business. The long term 'capital' is a low pass filter on short term profits.
What happens when central banker 'rig' the bond market returns lower?
In the short term, the banks shut down lending. The question is what is the safe return that makes lending go to zero? The nominal answer in a profitless bank with zero transaction costs is zero. That bank is automated and can shut down in pace with the lowering of bond yields.
That same ELB is positive for a profit bank, they have positive transaction costs by definition.
OK, fine so far. But there is another asset, good will. Well Fargo has good will, the Bank of Anarchy has none. Well Fargo will pay a nominal negative rate for a finite time out of past profits if the negative rates are temporary.
Wells Fargo will pay its central bank monopsony fee to maintain good will for a finite period. Its clients also maintain some good will by banking at negative rates, but not nearly as much. This is mostly about large banks like Wells Fargo who reasonably expect central banking to continue.
Like a loss leader, a sort of sticky hold just before the banks say, 'to hell with this' and exit the business. The central banking side, the monopsony fee should be easily determined by market, the amount of tolerable seigniorage the CB can extract.
Ultimately bankrupt governments cause negative bond rates. For the reasons stated above, a government exercises monopsony power to extract liquidity up to a small fee. The power is called cops and sheriffs, but is limited in time and scope. Thus time limited governments , eventually have MMT moments, small short finite periods of partial default.
If we accepted reality and simply had a trading pit for mandatory government defaults we would be better off. The New Fed does that. The New Fed expects government to return in 15 years, hat in hand. When we make the bet of how big the future government defaults then we have ELB at zero or slightly above.
The cost to society. CB is a given, sorry Mish it does not disappear. It can have varying market share. Chapter one says we pay a monopsony wedge, one way or the other. That fee is a bit less than half a point, due and payable as certain as chapter one econ 101. Mish has to pay it.
Pretending it is not so costs us a bunch in short term chaos during bankrupt government periods. We pay an extra 'This time is different' fraud charge. The Nixon Shock can attest to that. If we had ex post intelligence and smoothed the Nixon Shock we would still ave paid our half point monopsony fee, sorry Mish. But we could have gained maybe a quarter point eliminating unnecessary chaos.
But wait! It gets worse. We are facing the small state extinction chaos for which we are unprepared.
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