Monday, January 5, 2009

Lending is pro-cyclical. That's why the Fed is calling for a big stimulus

The Fed is beginning to see that interest rates have little bearing on loan creation. The chart below shows how bank loans are growing more slowly now despite the Fed's actions to reduce rates.

Total loans and leases at all commercial banks (y-o-y % change)

Loan creation is a function of the economy. In a weak economy loan demand will be flat to down and the Fed is beginning to understand this. That is why the Fed is calling for a big fiscal stimulus.

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