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Now I'm even more confused.

Kilkrazy wrote:Are US banks required by law to set their interest rate to match the Federal Reserve rate?

UK banks aren't.

Not quite.

The Federal Reserve (which is NOT exactly a private enterprise, but that's a slightly different issue) is the agency that sets the interest rate on banking reserves.

The Fed slashed that interest rate to basically nothing; significantly below inflation. What that meant was, in real terms, banks LOST money by saving. Since banks have to make a profit in order to survive, their only option was to lend out basically all of their funds, because any payout at all was better than the loss they'd suffer for saving.

The result? Banks quickly made all the good loans and started looking for anyone, anyone at all, to loan money. Since that was so, all kinds of entirely unsound investments got funded, and when the market started pulling back, the crash resulted.

EDIT: Another facet of the Fed's low interest rate policy is that the Fed also loans money to other banks. With interest rates so low, banks could borrow practically for free, which meant they had a huge pool of money to loan out. That also encouraged making bad loans, and spurred on the whole catastrophe.

Orlanth wrote:
Just as well seeing as the Federal Reserve is a private enterprise.

No it isn't. Its an independent body withing the state, or semi-private; depending on your chosen parlance.