Ezrati’s Economic Outlook: Fear and Bank Lending

Growth in commercial loans and the money supply suggest Fed easing is finally working.

The Federal Reserve recently released the results of its latest survey of senior bank officers. Like the economy—not coincidentally—the bankers’ attitudes were mixed. Things have improved over the past year. Bankers on balance have shown a greater willingness to extend credit. But still, they remain very cautious. This lingering reluctance to lend, understandable after the losses of 2008-09, offers yet another reason why the economy’s recovery has proceeded so slowly and will likely continue to do so for some time to come. Still, there are tentative signs that the environment is easing, certainly enough to support a recovery of sorts.

This caution among bankers has for some time thwarted the Fed’s efforts to push the economy forward. To accelerate the recovery, monetary policy makers have given the system ample financial resources for years now. From August 2008, at the beginning of the crisis, to the present, near zero short-term interest rates and two quantitative easing programs have expanded the Fed’s balance sheet hugely and poured liquidity into the financial system. Bank reserves, a key liquidity metric, expanded during this time an astronomical 3,428%, 281.4% a year on average. The monetary base, another liquidity measure that counts currency in circulation along with bank reserves, expanded at a rapid 39.2% annual rate during the same time. But because the banks have shown such a reluctance to lend, little of this massive infusion of liquidity has reached the general economy. 

About the Author

Milton Ezrati

Milton Ezrati

Milton Ezrati is senior economist and market strategist for Lord Abbett & Co. and an affiliate of the Center for the Study of Human Capital and Economic Growth at the State University of New York at Buffalo. His latest book, Thirty Tomorrows, linking aging demographics and globalization, will appear next summer from Thomas Dunne Books of St. Martin’s Press. See more of his articles about the economy here.

 

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