11/16/09 San Francisco, California – The motivating idea behind the various U.S. bank rescue measures was to do whatever it would take to get bank loans to the private sector growing again. That mission remains distinctly unaccomplished.
Despite all the policy machinations — from TARP capital infusions to outright asset purchases, temporary lending facilities, a near-zero fed funds rate and various guarantees on bank liabilities — loans outstanding in the commercial banking system have continued to contract. Instead, banks have preferred to accumulate securities rather than make new loans. Even those purchases have flattened in recent months as banks are back to hoarding more excess reserves.
We won’t argue with the counterfactual — without these measures, the contraction in bank loans outstanding would no doubt have been much more dramatic, as an Austrian-style simplification of balance sheets would have naturally gathered momentum following the Lehman Bros. bankruptcy. But the reality is neither the household nor business sector is eager to add to its debt, and bank loan officers are still battling rising loan loss recognition from the last private credit bulge. This is much as we anticipated — the private sector has hunkered down, is spending less money than it is earning and is paying down or liquidating existing debt loads.
Rob Parenteau
Rob Parenteau edits The Richebächer Letter, founded by the late Dr. Kurt Richebächer. Each issue provides an examination of the world’s currency and credit markets. Previously, he spent 24 years as Chief U.S. Economist and Investment Strategist for RCM Capital Management, an asset management firm. Rob holds a CFA and was appointed a Research Associate at The Levy Economics Institute in 2006. His papers have been presented at the Political Economy Research Institute, the Seventh and Eighth Annual Post Keynesian International Workshop, and the Eastern Economic Association.
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It makes sense for banks to be hoarding capital while they sort out their balance sheets. The idea that they want to lend when the regulators are climbing over their books looking for trouble makes little sense. As noted the consumers and businesses are not all that interested in borrowing unless they have pressing problems or the capital comes with few strings.
It will be a while before we reach the ‘new normal’.