Negative interest rates?

[I've been out of town and feeling lazy lately, hence the pause in blogging. Time to get back in the swing.]

A number of commentators are suggesting that the Fed reduce the interest it pays on reserves below zero. That is, whereas currently the Fed pays banks an interest rate of 0.25 percent on excess reserves (and banks now hold about a trillion dollars in excess reserves), the Fed could in principal reduce that to zero or negative whatever it wanted. Penalized for holding money idle, banks would have a strong incentive to make loans. There are two problems however:

1. It's not clear whether the Fed has the legal authority to do this. The law says the Fed can pay interest on reserves, but it does not explicitly say the Fed can charge interest. The Fed might be able to get around a prohibition on negative interest by charging banks "fees" that act like interest, but this would have to be cleared through legal, as they say.

2. If the Fed charged an appreciable amount of interest banks would choose to store their reserves as "vault cash" rather than their deposits at the Fed. The Fed might be able to counteract this move by including vault cash in the measure of reserves to be charged interest, but again it's not clear if this is legal. (I'm told that the Fed's mandate to provide an "elastic currency" would get in the way of this action.)

Discussing these options with a friend at the Fed I mentioned that the Fed needs to hire some more bankers. Bankers are very good at finding ways to screw their customers with hidden fees, which is just what the Fed needs to do to banks right now. "That's funny," he said, but I thought I detected a hint of melancholy in his voice as he said it.