Reserve Rate for banks has been dropped to zero.

Discussion in 'Economics & Trade' started by wgabrie, Oct 14, 2021.

  1. wgabrie

    wgabrie Well-Known Member Donor

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    (I'm not quite sure where to put this because it involves Banks, but this forum seems to be somewhat related.)

    Ok, so I'm taking an Economics class and the chapter on banking (in my several years old textbook), specifically the area of the required reserve ratio for banks (how much money the banks are required to hold, set by the Federal Reserve) said that in the real world banks are required to hold 3% of their reserve of checkable accounts (between the amounts of 14.5 million to 103.6 million). They gave a link to the Federal Reserve Board (Federal Reserve Board - Reserve Requirements), but it was not archived data but the live, current rate.

    As of March 26, 2020, the Reserve Rate for banks has been dropped to zero.
    So, what does this mean???

    In any case, I guess they don't foresee a run on the banks any time soon, but it seems to me that the banking system is now in a precarious position that could break if it's stressed too much in its vulnerable state.
     
  2. wgabrie

    wgabrie Well-Known Member Donor

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    Ok, so as I continue to study, making a big deposit in the bank results in a money multiplier, that is money moves between banks, less a reserve requirement amount, and creates value. Without needing to hold a balance (zero percent), all of the banks can use all of that money, that they hold (the excess reserves), to lend out money and earn something back.
     
    Last edited: Oct 14, 2021
  3. wgabrie

    wgabrie Well-Known Member Donor

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    The Fed's (Federal Reserve) expansionary monetary policy of reducing the amount that the banks must hold in reserve (reserve ratio) increases the money supply. And, it increases the money multiplier.
     
    Last edited: Oct 14, 2021
  4. Chrizton

    Chrizton Well-Known Member

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    In theory. In reality they are trying to jump start the stalling economy. The problem is money supply is too damned large. If you really want to delve into it, bookmark this link and keep an eye on it https://fred.stlouisfed.org/series/M2V

    Out of control federal debt is bringing velocity lower and lower and lower. It has been falling for the entire Biden Presidency.

    Velocity.PNG
     
  5. wgabrie

    wgabrie Well-Known Member Donor

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    Oh that's the M2 money supply. Which includes savings accounts, plus the M1 which is just cash and checking accounts. From what I've read so far, the Fed only has tools to affect the M1 money supply.

    So, what this M2 chart says to me is that people's savings accounts are running low. I wasn't sure where that site's M1 chart would be.
     
  6. Chrizton

    Chrizton Well-Known Member

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    The chart shows the Fed's measures the velocity of all US money
     
  7. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    Is this really a good idea? With all the money that is being printed and worries over inflation.
    It sounds like this might overstimulate the economy. And when that happens there is risk of a crash, or it will create a future drag on the economy later.
     
  8. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    It makes me wonder how much of this is political. Doing everything they can to stimulate the economy now, and let it crash after the next Presidential election.
     

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