The second is the reserve requirement. These are percentages of deposits, set by the Federal Reserve, that commercial banks must set aside either as currency in their vaults or as deposits at their regional Reserve Banks.
If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit.
Raising reserve requirements even further might not have enough of an impact to slow consumer lending.
High reserve requirements, which force Banks to park much of their capital with the Central bank, helped too.
Their weapons of choice: increases in the reserve requirement ratio and sales of low yielding bonds.
A more extreme move, and one that has been rumored in the markets, would be to cut the reserve requirement ratio.
And the recent lowering of bank reserve requirements is a godsend.
The People's Bank of China (PBOC) is expected soon to lift interest ratesand banks' reserve requirements once again.
The Federal Reserve Board can increase or decrease the percentage of cash reserve requirements, and can raise or lower the interest rates banks must pay for loans from the Federal Reserve Banks.
It then mops up this excess liquidity by issuing bills (as "sterilisation") or by lifting Banks' reserve requirements.
Among them, he says, reducing reserve requirements for Banks and letting them accept giant deposits overseas.
But if they want to help Banks cough up the cash needed to meet the new reserve requirement they could simply go slow on bond issuance.
The Board of Governors of the Federal reserve System is responsible for the discount rate and reserve requirements, and the Federal open market Committee is responsible for open market operations.
Indeed, the chancellor should institutionalise the approach and re-establish a permanent reserve requirement regime.
