Why Banks Aren't Lending
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.