A new Federal Reserve report shows that lending is down 15% from the nation's four biggest banks: Bank of America, JPMorgan Chase, Citigroup and Wells Fargo. Between April and October of this year, these banks cut their commercial and industrial lending by $100 billion, according to the most recent Treasury Department data. Loans to small businesses are down 4%, or $7 billion, during the same time period.
Lending from all banks surveyed showed the number of loans made was down 9% from last year (October 2008-October 2009). However, the outstanding balance of all loans made went up 5%. This means banks are making larger loans to fewer recipients.
Why is bank lending down? A variety of reasons, depending on who you talk to. The banks says there are fewer qualified borrowers thanks to the recession. Businesses say the banks have tightened up their lending standards. However, if you look at the 18 months of potential foreclosures in the pipeline, it looks like banks are hoarding cash to prepare for future write-offs. As I mentioned yesterday, they are also sitting on $1.1 trillion in government subsidies.
After yesterday's meeting with President Obama, Bank of America pledged to increase lending to small and medium sized businesses by $5 billion in the next year. That's after slashing lending by 21% ($58 billion) in the past six months.
This is just one more reason why I believe we will have a W-shaped recession. Bank lending is required to help businesses grow enough to create jobs. The public sector can only prod, stimulate and regulate the private sector. It can't replace it. The Great Depression and the New Deal showed the government can't create enough jobs to get the economy moving again.
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