Textbooks and most theoretical papers tell us that zero is the floor on nominal interest rates. But news reports in the last few days, noted by both Paul Krugman and Brad DeLong, have announced that some repurchase agreements in New York have had negative nominal interest rates attached to them, parties paying to lend money to others. This seems to be tied to very low short term rates on US Treasury bills, barely above zero, pushed down by TED risk spread so that one month bill rates are about 2% below the 2.25 overnight federal funds rate, which is private interbank loans. Negative nominal rates were last seen in the US on repos when the ffr was at 1%, especially during August to November, 2003, as reported in a paper by Michael J. Fleming and Kenneth Garbade in the April, 2004 Current Issues in Economics and Finance, of the New York Federal Reserve Bank.
It is not just the occasional repos that have had negative nominal interest rates. Barrons in 2006 has reported on a curious financial instrument issued by Berkshire-Hathaway known as "squarz." These have had negative nominal rates on them. Also, in 1998 for a brief period very short term government securities in Japan had negative nominal interest rates, during the pit of their deflation, as reported in the Monetary Trends column of Daniel Thornton from the St. Louis Fed in January, 1999. And, finally, although this has never been reported in print, I was personally told by the individual who handled dealings between the Fed and Freddie Mac that on Dec. 31, 1986, the last day of the old tax code before the Reagan simplification, when many were trying to close a lot of deals, the federal funds rate itself briefly went into negative territory down to about - 1/2 percent, although it also soared as high as about 18% on that rather wild ride of a day. In any case, things are getting weirder and weirder in the current frenzy of the financial markets.