The Great U.S. Liquidity Trap of 2009-11: Are We Stuck Pushing on Strings?

After the onset of the Great Recession in 2008, commercial banks in the United States began accumulating huge cash reserves in their accounts at the Federal Reserve. By the middle of 2011, reserves had reached $1.6 trillion, more than 10 percent of U.S. GDP, an order of magnitude for commercial bank cash holdings that is without precedent. The key factor allowing banks to accumulate huge cash hoards was that the Federal Reserve had pushed the federal funds rate to near zero by the end of 2008, and held it there through 2011 and beyond. Over this same period, the non-corporate business sector obtained zero net credit. This overall pattern represents the most recent variant of reaching a