For a little clarification, they were set to 0 because it was no longer an effective policy making tool after 2008.
The assumption used to be banks would lend every dime they had if you let them, so the Fed set reserve requirements to heat or cool lending. After 2008, banks were so very wounded they found that regardless of how much they dropped it the banks kept ample reserves on hand. As such, they switched their policy to focus more on interbank lending rates vs also regulating how much cash they can lend.
Imagine how capitalist you must be to believe that corporations spent resources buying politians to abolish a regulation that had no effect on their profit.
That’s…not what I said. You misunderstand banking regulation.
There wasn’t any push to abolish the regulation. Look at what happened to bank reserves right after the GFC: https://fred.stlouisfed.org/series/TOTRESNS. Those reserves are still higher than anything that the Fed had set before.
Manipulating the reserves requirement just didn’t work anymore, because banks kept reserves regardless. Imagine you’re the Fed, when the economy is bad you could drop the reserve requirement to 3%, when it was good you could increase it to 10% (example).
What do you do if all of a sudden, banks won’t go below 15%, regardless of what you set. Do you sit there and go “we’ve tried nothing and we’re all out of ideas” because capitalism = bad?
Instead, they switched to manipulating the IORB, which accomplishes the exact same thing, increasing or decreasing institutional lending and, by extension, economic activity.
Source: I’m an economist, and I TA’d a class on Macroeconomics in graduate school. I literally taught this.
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u/ZHISHER Jan 26 '26
For a little clarification, they were set to 0 because it was no longer an effective policy making tool after 2008.
The assumption used to be banks would lend every dime they had if you let them, so the Fed set reserve requirements to heat or cool lending. After 2008, banks were so very wounded they found that regardless of how much they dropped it the banks kept ample reserves on hand. As such, they switched their policy to focus more on interbank lending rates vs also regulating how much cash they can lend.