Need a loan? Why the banks (and Fed) are saying 'Scrooge you'

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If the credit crisis is over -- and it most certainly is as measured by tighter credit spreads -- why aren't banks making loans to the people who need them most, American taxpayers?

You don't have to be the chairman of the Federal Reserve to know that banks are behaving worse than Scrooge when it comes to extending credit to small businesses and consumers. Ben Bernanke admitted as much in a recent speech, which is perplexing since a zero-interest-rate policy (ZIRP) is supposed to stimulate economic growth, most of which is generated by those very same small businesses and consumers.

Low short-term interest rates are supposed to do wonders for an economy in crisis. Not only is ZIRP supposed to spur borrowing for consumption and investment (hence the risk of asset bubbles), but it crushes the value of the dollar, making U.S. exports cheaper, theoretically (cough) creating jobs. And yet, perversely, ZIRP might actually be a drag on economic growth, says Ed Yardeni, president of Yardeni Research, a well-regarded firm that sells strategy, research and data to institutional investors.

There's no question the extraordinary measures the Fed took in flooding the economy with money last year saved the banking system, Yardeni told clients ahead of the holiday, and for that he is thankful. But that's about as much love as Dr. Ed, as he likes to be called, is willing to extend toward Bernanke & Co.

"I don't want to sound ungrateful, but I would like to send another message to the Fed about its current policy: 'Thanks for nothing,'" Yardeni wrote Wednesday. That's because ZIRP may very well be the reason that banks are essentially hording cash, he says. After all, why make risky loans to little old you and me when a bank can make a tidy profit by borrowing cheap money (that is, by paying us almost nothing on our deposits) and then going out and buying higher yielding risk-free Treasurys?

"Despite the Fed's generosity, U.S. commercial banks have been very stingy with their borrowers," says Yardeni. "Bank loans are down $419.6 billion so far this year, led by a $230 billion drop in commercial and industrial loans. Over the same period, on the other hand, their holdings of Treasury and Agency securities have increased $141.9 billion and their cash holdings...rose $247.7 billion."

Dr. Ed believes that banks aren't lending in large measure because it makes more sense for them to buy Treasury and Agency securities so long as they are certain that the Fed won't raise interest rates. "Why make risky loans, especially when the jobless rate exceeds 10%, if the Fed is guaranteeing a 'carry trade' with deposit rates near zero and the opportunity to buy lots of riskless securities with higher yields that aren't likely to rise given the Fed's do-nothing stance," he says.

If Yardeni is right, this is a galling state of affairs. Rather than extend loans to small businesses and consumers (and reward suckers, er, savers with at least a smidgen of interest), banks are just borrowing cheap money from us to buy higher yielding assets -- and then pocketing the difference.

In other words, not only did taxpayers have to bail out the banks, but now we're footing the bill to boost their balance sheets and bottom lines. It seems some people are having a happier Thanksgiving than others.

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