The Banks Are Not Lending ….

We began a note on this a year ago (Are Banks Afraid to Lend? unfinished), mainly to document our thoughts and correspondence on the issue. At least as far back as 2009 we were considering the possibility that lending was not occurring, a common critique of the system at the time, because there was lack of demand or lack of willing credit-worthy borrowers. This was certainly not a common viewpoint. Unfortunately, the ignorance that produces this viewpoint remains. We summarize the issue below.

The Credit Market As a Bilateral Structure

To state the obvious, a loan occurs when a willing lender and a willing borrower reach a contractual agreement acceptable to both parties and called a loan. The understanding of the term “willing” is that each party agreed to the terms of the loan. The psychological state of either party is irrelevant to the completion of the contract. The lender may be under pressure to spend a vault full of cash earning nothing. The borrower may be under some kind of personal duress. The point is that a loan is a bilateral arrangement and will occur when an acceptable degree of mutual trust (your banker always does a credit cheque on you) is established.

So we get a tad excited when we read statements such as:

Did you know that U.S. banks have more than 1.8 trillion dollars parked at the Federal Reserve and that the Fed is actually paying them not to lend that money to us? (Michael Snyder of The Economic Collapse blog)

As we have written elsewhere, banks have a single objective – make money! The Fed pays them 0.25 percent on their reserves. Any loan they make is at many multiples of this figure. Bankers are smart people. Conclusion: they cannot find credit-worthy borrowers. There is no demand for these reserves!

True, bankers are not lending. And the other side of the binary credit market is true also. The public including business, cannot or will not borrow any more. Certainly there is lending and borrowing going on every day. There is more than enough liquidity – cash in the vaults or reserves with the Fed – to facilitate all viable transactions in the economy. But the amount of lending is far below what the reserves – liquidity – will support.

In this case, the author has completely ignored the borrower side of the credit market. This may in part be a lack of vocabulary. We have terms – lender and borrower and their synonyms – to describe one side of a credit market transaction. We can’t think of any term that encompasses both sides. Incidentally, for a good explanation of these unspent bank reserves and the Fed’s payment of interest on them read Forget Tapering and Exit via Reserve Requirements by Bob Eisenbeis.

Addendum: 20131211

We received a post from Mike Shedlock today, High-Powered Idiocy from Academic Wonderland; Three Reasons Banks Not Lending; Blinder is Blind, in which he argues the same points we were arguing back as far as 2008.

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