As the chart above indicates (which is in log scale), loan volume typically drops after a recession. In addition:
To accuse banks of engaging in highly profitable “curve trades” in lieu of private-sector lending misses the point. That’s how it always works. When the economy goes into recession, the Fed lowers the short rate and steepens the yield curve. Private sector credit demand is weak while the government’s appetite is strong. Banks are happy to lend to Uncle Sam. Those loans expand the money supply, which gooses demand in the short run.
2 comments:
Banks are in a damned if you do, damned if you don't position. At the end of the day banking isn't a charity, it's a business. Though I somewhat disagree that "it misses the point." If I can borrow oodles of money from the Fed at near zero and make a guaranteed loan to Uncle Sam and make on the spread, sure I'll do that over customers in a weak economy.
I'll grant you that loan demand is weak, if demand for goods & services are weak why the hell should I expand? At the same time, I know three solid businesses who are making money who can't get a loan to expand. So you are seeing something of a crowding out situation, only it's the banks driving it to grab that safe yield.
Johnny
Don't forget that The Fed is paying interest on excess reserves so not only are they making oodles on the spread they get the interest on the excess reserves which virtually negates the cost of borrowing from the Fed making these kinds of deals in this environment almost 100% profit.
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