Wednesday, July 14, 2010

Why Aren't Banks Lending?

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.