An impatient White House prodded banks and other financial companies Tuesday to quit hoarding billions of dollars flowing into their vaults from Washington and start making more loans ... "What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said. While there are limits to Washington's power to affect banks' behavior, the White House decided it was time to use its bully pulpit.
So what does the evidence show? David Beckworth has some insights:
When thinking about the credit crisis question, I think it is useful to look at the money multiplier for the monetary base. The monetary base is a measure of money that includes currency in circulation and bank reserves. It is also a measure of money that the Fed controls and uses to alter liquidity in the banking system. In normal times, the Fed can increase the monetary base by injecting reserves into the banking system. Banks, in turn, lend out a portion of these reserves to borrowers who then spend the funds ... Banks' balance sheets are hemorrhaging and the economy is in a recession. Banks are not eager to make loans in this environment and are more likely to sit on the new reserves coming from the Fed. This development means less credit and if pronounced enough a credit crunch. One implication is that if, in fact, there is a credit crunch then the money multiplier should be sharply falling. Thus, it makes sense to look at the money multiplier. The figure below provides the money multiplier using MZM as the broad measure of money and the St. Louis Fed's monetary base measure ... This figure shows the money multiplier peaked the week of 6/4/08 and begin a sharp descent in late August. Compared to the credit crisis of 1990-1991, Y2K, and 911, this drop is huge.
It does seem that there is an increase in excess reserve demand. Why banks desire to hold more reserves might be an interesting question but I seriously doubt that this Administration are about to mandate maximum reserve holdings.