There are many things to worry about for the economy in 2010, but perhaps the leading cause of anxiety is bank lending, or the diminishing state thereof.
Commercial and industrial loans made by U.S. commercial banks fell in November to the $1.36 trillion, the lowest since September 2007, reports the Federal Reserve. This isn’t surprising after the large negative economic shock over the past two years, but it’s troubling nonetheless.
The Federal Reserve can print all the money it wants, but if the liquidity isn’t finding its way into the coffers of businesses, the recovery will suffer. Financial institutions, of course, are only too happy to accept the central bank’s monetary gifts of late. Nothing makes a banker smile more than a world where he can borrow short and lend long. But while there’s a whole lot of borrowing short going on, there’s a dearth of lending. What are they doing with the money? For reasons that need no explanation at this point, banks have been focused on rebuilding their balance sheets.