The Story Of Lost Billions: Why Are Banks Not Lending Money?

December 4, 2010 9:48 pm

Well, lending a helping hand to all those banks with trillions of dollars had one stated purpose: to avoid a systemic failure of the banking system which would bring the whole economy to a standstill. The Fed quickly followed up with free money distribution (a.k.a. lower interest rates. well, the way we understand, zero is generally interpreted as free). And this had a stated purpose as well: such manipulation of the yield curve would result in many no-brainer business decisions for the banking folks: take all this free money, lend it as much as you can at whatever rates the market would take, and make a killing. Sounded like a good plan.

Turns out, the plan wasnt that good after all. What went wrong? The banks are not lending. Remember the story of the child that wouldnt go anywhere near fire after ‘feeling’ fire once? The banks, apparently, are no different. Free money from Fed, QE2 and an indication of QE3 – nothing has changed the defensive approach of banks.

This is from The Economist: According to Barclays Capital, an investment bank, lending by banks to businesses in most big, rich economies, which had been growing rapidly before the onset of the global financial crisis, fell sharply in its aftermath. Canada, which did not have a runaway credit boom before the crisis, and whose banks came through the credit crunch largely unscathed, was an exception. Lending in most rich economies was still lower in the third quarter of 2010 than a year earlier, but the pace of the decline in lending has eased markedly in the last couple of quarters.

Looking at the numbers in the chart though, the picture is not so green, yet.
Statistics Source: The Economist

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