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.
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