Geting interest rates below zero

Now that the Fed effectively has interest rates to zero, what does it do as the economy worsens.?One Fed official says that policies need to be set up so that rates are effectively below zero.

According to Reuters, Charles Evans, president of the Chicago Fed said, Quantitative easing, a way to flood the banking system with large amounts of money, "is a way to mimic below-zero rates and provide support to the economy." Usually that would involve the agency buying up huge amounts of assets from banks.

There is another potential alternative, although it has never been tried. If the Fed plans to spend tens of billions of dollars buying assets, why not put the money into the system by offering the capital to banks at a negative .5%? The reasoning against this is the the Fed would be paying the banks interest on the money they borrow instead of the tradition model of the banks paying the Fed.

The odd program might have two effects. The first would be to increase bank lending to business and consumers. With the Fed paying interest for bank borrowing, the risks of bank lending would drop. The other by-product is that banks could rebuild their balance sheets damaged by losses from investments like mortgage-backed securities, with capital being underwritten by the Fed.

It's crazy, but it might work.

Douglas A. McIntyre is an editor at 247wallst.com.