Tuesday, August 21, 2012

A Disturbing Situation

Here is a Bloomberg article on banks that are buying Treasuries rather than making loans.  The article's first few paragraphs offer one reason why the economy is growing slowly:

As deposits increased 3.3 percent to $8.88 trillion in the two months ended July 31, business lending rose 0.7 percent to $7.11 trillion, Federal Reserve data show. The record gap of $1.77 trillion has expanded 15 percent since May, the biggest similar-period gain since July, 2010. Banks have already bought $136.4 billion in Treasury and government agency debt this year, more than double the $62.6 billion in all of 2011, pushing their holdings to an all-time high of $1.84 trillion.

Faced with a slowing U.S. economy, unemployment above 8 percent for more than three years and regulations forcing them to hold more and higher-quality assets, banks are lending at below pre-recession levels. The bond purchases help explain why even after rising this month, Treasury 10-year note rates are about half the 3.5 percent median forecast of 43 economists in a Bloomberg survey a year ago. 
The banks should make loans, not invest in Treasuries.  These banks better be good bond traders.  When interest rates move up the crush of banks selling Treasuries is going to make the bankers wish they had made loans.

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