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Business and Labor

Toxic Asset Shock Impeding Bank Lending to Real Economy

Bank Lending(Analysis) As US banks still remain underwater six years after the onset of the 2007-8 financial crisis, their lending to the real economy – to both business and consumers, is still falling when measured relative to their net assets (see chart. Net assets are total assets minus intangibles like goodwill). This is one very strong reason why monetary policy is currently ineffective, even though the actions taken by the Fed to date are unprecedented. US banks are simply keeping the effects from extraordinary monetary stimulus – historically low interest rates and quantitative easing (QE), as soaring balances parked at reserve accounts with the Fed, in order to hedge against potential financial loss from their still toxic assets. Scandalously risky behavior by banks prior to the financial crisis is still damaging the real economy today.

Without the benefit of ample credit to support sufficient investment and consumption, the private sector instead is drowning in a sea of suppressed demand. This condition has a tendency to become long-lasting once a loss of confidence in markets becomes self-fulfilling. As we begin a sixth year of below-trend economic performance, expectations truly are diminished – and diminishing further still.

The ongoing round of QE includes purchases by the Fed of assets other than safe government securities, like mortgage-backed securities. While not an openly stated policy objective, one likely goal of the Fed in its latest round of QE is to alleviate some of the toxic asset shock from which banks are still suffering. If so, then this would be a back-door method to circumvent popular outrage against the controversial Troubled Asset Relief Program, as it has the same potential to restore health to bank balance sheets suffering from toxic asset shock.

After trillions of US dollars pumped into and through the banks by the US Government since the beginning of the financial crisis of 2007-8, regulators and lawmakers should now see clearly the role that proper oversight of this industry plays in delivering a healthy real economy. Voters, especially workers and their families, surely have. If elected officials believe that they can go back to the old ways of legislating, where in exchange for large political contributions they support legislation on a quid-pro-quo basis – “pay to play”, then they will continue to be surprised by polling results. US politics is slowly returning to an American tradition of government for the people and by the people, and unlike silly court decisions such as Citizens United v. the Federal Election Commission, US citizens know exactly what a real person is, and they know what a real person is not – definitely not a corporation.

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