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Growing Bank Credit Key to Recovery

The U.S. economy's recent growth pales in comparison with recoveries of the post-war period prior to 1990

By Asha Bangalore | Updated on January 01, 2011

The U.S. economy has registered five consecutive quarters of economic growth since the recession ended, yet there is a great deal of concern about the outlook for 2011. The 2.9% average increase in real GDP over these five quarters pales in comparison with recoveries of the post-war period prior to 1990. One major factor in this subpar economic recovery is the contraction of bank credit, which has a strong positive correlation with gross domestic purchases.

Following the housing market debacle and the long and deep U.S. recession, the sum of loan charge-offs and delinquent loans at commercial banks rose to an unparalleled $531 billion by the end of 2009, up from $93 billion at the end of 2005. This large setback left banks with impaired balance sheets and severely restricted their ability to lend. Although the Fed injected vast amounts of reserves to stabilize the banking system, the monetary transmission mechanism was dysfunctional, and bank credit fell 6.5% in 2009, the second and largest decline in the post-war period.

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