Should We Laugh or Cry?

From today’s WSJ:

But excess reserves have surely made banks feel safer, something backed up by history. The Fed’s moves to trim excess reserves in the late 1930s, by raising minimum requirements, arguably helped create another economic downturn. “The Fed apparently wasn’t aware that banks wanted to hold these reserves,” says Paul Kasriel, economist at Northern Trust. “The result was that banks started to cut lending.”

The current Fed has extra tools to avoid such mistakes, such as the ability to pay higher interest on excess reserves to keep them dormant if necessary.

More and more I think this whole crisis was caused by mysterious bout of mass stupidity.

About Scott Sumner 490 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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