Central Banks Should Limit Bank Deposits

Waterfall symbolizing the
Alan Greenspan Theory

There is something called the "transmission effect" meaning that when the central banks infuse liquidity into the banking system it sooner or later comes out into society. Alan Greenspan, former Fed Governor, described it as pouring water at the top of a mountain. You know it will eventually get to the valleys but you do not know when and which ways it will take. During the crisis of 2007-2009 the transmission effect stopped functioning. We discussed with central banks about it and we found that some did find other ways to get liquidity out in the none banking system and some did not. We are again seeing that the transmission effect does not work. Banks deposit a huge amount of its cash with the central banks, which in effect are bank runs and the central banks need to put even more money into the bank system in a vicious circle. This must now stop. One way might be to limit the amount each bank can hold with the central bank forcing the excess liquidity out to the real economy. Just a thought...