And isn't that how it should work? The extra money around is supposed to make people do something with their money apart from depositing it with a bank.
The reason the Fed issued the money to banks is so they don't collapse.
Why would they collapse? Banks use deposits as collateral to make investments. During the crisis, a lot people and institutions were panicking and withdrawing whatever they had in the market.
So the Fed issued a bunch of money and loaned it to banks on generous terms to prevent a Domino effect where institutions fail one by one.
It's probably what prevented a giant meltdown of the economy.
It also changed the dynamic for the banks. They were loaned trillions by the Fed for next to nothing -- much better deal than fighting over people's deposits. So we won't see deposit interest rise until some of that money is taken away. (My understanding is that hasn't happened.)
A couple years ago, the Fed paid the banks to sit on that money and not use it, but I'm not sure if that's related. Somebody more informed might be able to fill that gap.
