Jul 21, 2011
Why banks aren’t lending
By Ellen Brown
Why aren’t banks lending to local businesses? The Fed’s decision to pay interest on US$1.6 trillion in “excess” reserves is a chief suspect.
Where did all the jobs go? Small and medium-sized businesses are the major source of new job creation, and they are not hiring. Startup businesses, which contribute a fifth of the United States’ new jobs, often can’t even get off the ground. Why?
In a June 30 article in the Wall Street Journal titled “Smaller Businesses Seeking Loans Still Come Up Empty”, Emily Maltby reported that business owners rank access to capital as the most important issue facing them today; and only 17% of smaller businesses said they were able to land needed bank financing. Businesses have to pay for workers and materials before they can get paid for the products they produce, and for that they need bank credit; but they are reporting that their credit lines are being cut. They are being pushed instead into credit card accounts that average 16% interest, more than double the rate of the average business loan. It is one of many changes in banking trends that have been very lucrative for Wall Street banks but are killing local businesses.
Why banks aren’t lending is a matter of debate, but the Fed’s decision to pay interest on bank reserves is high on the list of suspects. Bruce Bartlett, writing in the Fiscal Times in July 2010, observed:
Economists are divided on why banks are not lending, but increasingly are focusing on a Fed policy of paying interest on reserves – a policy that began, interestingly enough, on October 9, 2008, at almost exactly the moment when the financial crisis became acute …
Historically, the Fed paid banks nothing on required reserves. This was like a tax equivalent to the interest rate banks could have earned if they had been allowed to lend such funds. But in 2006, the Fed requested permission to pay interest on reserves because it believes that it would help control the money supply should inflation reappear.
Many economists believe that the Fed has unwittingly encouraged banks to sit on their cash and not lend it by paying interest on reserves.
We may be skating on very thin ice here, but the weight of the evidence still supports a weak bull case for the near to intermediate term. So I’m adding buy picks on the chart pick list and adjusting trailing stops to account for the risk.
These reports are not investment advice. They are for informational purposes, for a broad audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance.