You are hereTruthout: Why Banks Aren't Lending: The Silent Liquidity Squeeze

Truthout: Why Banks Aren't Lending: The Silent Liquidity Squeeze

-by: Ellen Brown

July 15, 2011- Where did all the jobs go? Small and medium-sized businesses are the major source of new job creation, and they are not hiring. Startup businesses, which contribute a fifth of the nation's new jobs, often can't even get off the ground. Why?

In a June 30 article in The Wall Street Journal titled "Smaller Businesses Seeking Loans Still Come Up Empty," Emily Maltby reported that business owners rank access to capital as the most important issue facing them today; and only 17 percent of smaller businesses said they were able to land needed bank financing. Businesses have to pay for workers and materials before they can get paid for the products they produce and for that they need bank credit; but they are reporting that their credit lines are being cut. They are being pushed instead into credit card accounts that average 16 percent interest, more than double the rate of the average business loan. It is one of many changes in banking trends that have been very lucrative for Wall Street banks, but are killing local businesses.

The Travesty of the $1.6 Trillion in "Excess Reserves"

The bank bailout and the Federal Reserve's two "quantitative easing" programs were supposedly intended to keep credit flowing to the local economy; but despite trillions of dollars thrown at Wall Street banks, these programs have succeeded only in producing mountains of "excess reserves" that are now sitting idle in Federal Reserve bank accounts. A stunning $1.6 trillion in excess reserves has accumulated in bank reserve accounts since the collapse of Lehman Brothers on September 15, 2008.
The justification for TARP - the Trouble Asset Relief Program that subsidized the nation's largest banks - was that it was necessary to unfreeze credit markets. The contention was that banks were refusing to lend to each other, cutting them off from the liquidity that was essential to the lending business. But an MIT study reported in September 2010 that immediately after the Lehman collapse, the interbank lending markets were actually working. They froze, not when Lehman died, but when the Fed started paying interest on excess reserves in October 2008. According to the study, as summarized in The Daily Bail:

... [T]he NY Fed's own data show that interbank lending during the period from September to November did not "freeze," collapse, melt down or anything else. In fact, every single day throughout this period, hundreds of billions were borrowed and paid back. The decline in daily interbank lending came only when the Fed ballooned its balance sheet and started paying interest on excess reserves.

The Fed began paying interest not just on required bank reserves (amounting to 10 percent of deposits for larger banks), but also on "excess" reserves on October 9, 2008. Reserve balances immediately shot up and they have been going up almost vertically ever since.



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