The HS Dent Financial Blog

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Big Shock: Banks Don’t Lend More When the Government Asks Them To!

We are shocked — SHOCKED! — to find that Bank of America and other large institutions did not respond to Treasury Secretary Geithner’s entreaties to lend more freely:  “Geithner Saying ‘Be Like Buffet’ Can’t Make JP Morgan Lend More.”

Bloomberg writes,

While financial institutions including Citigroup Inc. and Bank of America Corp. have received more than $200 billion in capital from the government, they are limiting loans at a time of mounting unemployment, rising company bankruptcies and increasing regulatory oversight. Commercial and industrial lending has dropped 17 percent since October 2008, according to Federal Reserve data.

Economic growth will be slower and short-term interest rates will stay lower for longer than economists and investors expect because of banks’ reluctance to lend, says Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York. Bank profits may be restrained and bond prices boosted as institutions put money into safe Treasury securities rather than making riskier, more lucrative loans.

Bank executives are not fools (the lax mortgage lending standards of the mid 2000s notwithstanding).  When they look at the economic environment — even after recent improvements — they do not like what they see.  Rather than lend money in a risky, uncertain, and politically-charged environment, many would rather keep their funds in US Treasuries.

This is why, despite the record expansion of the monetary base, we had yet to see convincing signs of inflation.  When risk appetites wane, credit creation stops, and the velocity of money slows.  And that is where we continue to find ourselves today.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy