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The thing to understand about the change in policy regime that led to the elimination of the reserve requirement is this: banks were (and are) holding massively
by NovemberWhiskey 4y ago
The thing to understand about the change in policy regime that led to the elimination of the reserve requirement is this: banks were (and are) holding massively more reserves than they needed to. They didn’t need the Fed to tell them to do this, so it was not an effective monetary policy tool any more.
In economic terms: the supply of reserves was so high that it was in an inelastic part of the demand curve for reserves.
The new regime (“ample reserves”) depends on administered interest rates, rather than reserve requirements, to set short-term interest rates.
It is absolutely not the case that the reserve requirements were removed to allow banks to reduce their reserves.
- mike_d 4y agoAll cars have seat belts. It isn't effective policy to require them.
- NovemberWhiskey 4y agoYou need to extend your metaphor. Imagine instead that the government was paying car manufacturers more than the cost of installation for every seat belt in a car. You wouldn’t need to have a policy requiring seatbelts: every car would be liberally festooned with them.
- pishpash 4y agoBut it costs the taxpayer money that way via the interest payments, whereas one more regulation doesn't.
- NovemberWhiskey 4y agoHonestly, if you don't understand the difference between the Treasury and the Federal Reserve (as this comment suggests), I'm sorry to say that you're not going to find this conversation very enlightening.
- pishpash 4y agoYou must not know that the Federal Reserve returns income to the Treasury.
- eru 4y agoIn 2008, the Fed started paying interest on excess reserves.