Last week's decision by the Fed to buy $600 billion in Treasury bills was intended to give banks' greater incentive to make loans and help expand the economy. But a new report - from the Fed itself - seems to undercut that strategy somewhat. A survey showed that over the past quarter, banks had already begun to ease their standards for business lending. They also were more willing to make consumer installment loans and relaxed the terms on credit card loans.
But that doesn't mean that more of these loans are being made. The same survey found that demand for business lending had fallen during the quarter, after having been up somewhat during the previous quarter. Over the past two years, since December 2008, business lending has dropped from $1.62 trillion to $1.22 trillion. Demand for mortgages also remained weak during the quarterly survey period.
So apparently the expansion of credit is being held back as much by a lack of demand as it is by the banks' unwillingness to lend money. It is of course in the banks' interest to lend money, since that is how they make their profits. What they need now is not more money, but more customers.
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