1 Reason the Recovery Is So Slow

Even though it's been nearly five years since the onset of the financial crisis, the economy continues to suffer from its effects. GDP growth remains lackluster and unemployment seems to have stalled above 8%, nearly twice the so-called natural rate.

With the campaign season in full swing, it's easy to blame politics. If you're a Democrat, you likely pin it on the Republicans for their refusal to underwrite fiscal stimulus akin to the New Deal. If you're a Republican, meanwhile, you probably think the stunted recovery has more to do with big government and overburdensome regulation.

In reality, however, if you were to isolate only one group, the responsibility lies most on the banks, gatekeepers of the nation's credit. The purpose of the banking industry is simple: to accept money from depositors like you and me, and reallocate it to businesses and entrepreneurs who use it for productive purposes such as investing in capital improvements and expanding production.

With this in mind, it should be no surprise that the trend in deposits and loans have traditionally paralleled each other; when one goes up, so does the other. But as you can see in the chart below, this relationship has broken down since the onset of the financial crisis. While deposits continue to rise, loans remain at precrisis levels.

Source: FDIC statistics on depository institutions.

The explanation for this breakdown is threefold. First, until recently, many banks had been reluctant to make new loans while they're still working through the toxic mortgages dating to before the crisis. While more traditional lenders like New York Community Bancorp (NYSE: NYB  ) have been able to rein this in, the nation's largest banks remain ominously weighed down.

In the case of Bank of America (NYSE: BAC  ) -- the nation's second-largest lender by assets -- a staggering7.5% of its loans are noncurrent. This is double the industry average and over seven times the 1% level that an otherwise healthy institution would report. And the nation's third-largest bank by assets, Citigroup (NYSE: C  ) , has a staggering $100 billion in potentially toxic loans squirreled away in a much maligned division known as Citi Holdings.

Second, banks are operating under the twin clouds of regulatory and economic uncertainty. On the regulatory side, the biggest banks remain pitched over the implementation of Dodd-Frank, and most particularly its so-called Volker rule, which seeks to prohibit them from speculating with depositors' money in a manner reminiscent of Glass-Steagall. On the economic side, alternatively, all eyes are on Europe, which seems to be on the brink of failure every other week.

Finally, and for understandable reasons, lenders are stockpiling high-quality liquid capital. In the aftermath of the crisis, as already noted, rising loan losses caused many banks to watch as their capital levels depleted. This is the reason so many banks have failed over the last few years, the largest of which, Washington Mutual, was seized by federal regulators in September 2008 and sold to JPMorgan Chase (NYSE: JPM  ) shortly thereafter.

In addition, due to important lessons learned over the last few years, both domestic and international banking regulators are starting to require that banks hold more and better assets in reserve to help protect against similar crises in the future. Under the new regime, known as Basel III, banks may soon be required to hold 4.5% of common equity, up from 2% in Basel II, and 6% of Tier I capital, up from 4% in Basel II, relative to risk-weighted assets. According to a study from the OECD, this could lower global GDP growth by 0.05 to 0.15 percentage points annually.

Waiting for the recovery
It isn't an exaggeration to say that credit is the lifeblood of our economy. It allows consumers to buy houses and cars, and companies to finance current operations and expansion. Indeed, as we learned when the credit markets seized in the depth of the financial crisis, business literally comes to a stop without credit greasing the wheels of commerce. It's for this reason that all investors should keep one eye on trends in this area, as it's likely here that we'll first see signs of recovery and progress.

To learn the identity of the "only big bank built to last," click here now.

Fool contributor John Maxfield owns shares of Bank of America. The Motley Fool owns shares of JPMorgan Chase, Bank of America, and Citigroup. The Motley Fool has a disclosure policy

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  • Report this Comment On September 01, 2012, at 7:00 PM, JimmyZangwow wrote:

    The recovery is so slow, because it isn't even a recovery. ARRA is done, now watch what it would have been like without all that extra paper in people's pockets.

  • Report this Comment On September 01, 2012, at 7:09 PM, vaderblue wrote:

    My thoughts are this. Corporations, banks are reluctant to hire and expand again in loaning money. They prefer to keep that cash on their balance sheets until they can see some positive

    government. They are too busy calling names and blaming others rather than implementing polices to move this economy.. If we go another four years under Obama, Reid and Pelosi then we all will starve for they do not have a clue how to move this nation forward. Lawyers are lawyers, not business minded. Obama took this office with no experience at all in business. Would you buy stock in his corporation. I sure wouldn't. No growth and no dividends.

  • Report this Comment On September 02, 2012, at 6:27 AM, Zankudo wrote:

    Then vote for the ante-deluvian party, you know the one of Hoover, also a business man, and Grant and Harding, not business people, but indicative of the capital cronyism extant. You wouldn't vote for a Dem like FDR who inherited wealth and primed the pump ending the depression, or his last VP Truman the failed haberdasher who with his team saved Europe and had more sense in his little toe than all the Regressives that followed him, the guy that said the only things you do not know is the history you haven't read, who refused to prop up the French in Indochine, who refused to go along with the Brits and overthrow the Democratically elected government in Iran but oh boy did Ike allow the Dulles brothers to do it giving them the Shah which to led to what now brother? There is more to life than money and economics. Obama has his deficits, but Romney and the rest of the liars in that party live in the past and in the bubble. By the way Romney has the law degree but the guy never practiced where the road meets the rubber. Do that and you get a whole new perspective on people rather than dry money-making.

  • Report this Comment On September 02, 2012, at 8:20 AM, ETFsRule wrote:

    You didn't mention the fact that there is simply less demand for loans. Also, when people default on a mortgage, it leads to a decrease in loans, as seen on your graph.

    I think it shows a misunderstanding of the situation to claim that banks have "decided" to stop lending.

  • Report this Comment On September 02, 2012, at 7:15 PM, Darwood11 wrote:

    The divergence since 2008 is interesting, but is not all that surprising.

    1. People are shedding debt. By the very definition, that means they aren't borrowing.

    2. People are paying off their home mortgages. That means, the value of their loans are falling.

    3. New home loans are not only at the lowest level since 2007, but there are supposedly a lot of home purchases using cash. That's amazing!

    4. As time goes by, mortgages do get paid off. Since 2008 how many owners have done that and no longer owe any mortgage debt?

    Frankly, I'm encouraged by the levelling off of borrowing. True, some people who would like to purchase a home at record low prices and rates are miffed when they are passed over. One such person was highlighted in a recent WSJ article. As I recall, she stated that she had a $35K annual income from her job and $60K student debt. She and her spouse didn't qualify for the loan they wanted. I'm sure that was a personal disappointment. On the other hand, that might be a couple of outstretched hands that we won't have to bail out in a few years.

  • Report this Comment On September 03, 2012, at 4:56 PM, ARTS100MP wrote:

    Looking at recovery. No one wants to commit to a large debt when the govenrment is ready willing and able to change the rules of free enterprise. I, for one want to conserve, because the present admin is very much against us homeowners.

  • Report this Comment On September 03, 2012, at 4:56 PM, tkell31 wrote:

    There's only so much spending the super rich can do. All those trillions in "stimulis" went right from the printing press to the bank accounts of CEOs and people friendly to each party. 60% of the country continues to see their real earnings decrease in the face of inflation. Just like sports teams need a cap to stop stupid GMs from spending through the roof we need a cap on earnings or else the rich will justify taking all the money out there in the name of crony capitalism.

  • Report this Comment On September 03, 2012, at 5:02 PM, woodNfish wrote:

    This article is one of the reasons I don't look to Motley Fool for financial analysis. While the government does not create jobs it is very capable at destroying them, and that is what this administration has been doing for the last 3 1/2 years as well as borrowing and spending us into bankruptcy.

    Obama may not have started it and it took both parties to get us here, but Obama is the worst of all of them.

  • Report this Comment On September 03, 2012, at 5:05 PM, dialysisjoe wrote:

    With all due respect, the problem with banking goes much deeper than mentioned in this article, which is very good, by the way. Our problems with banks began back in 1913, when the Federal Reserve Act and the IRS Act were both passed, without a quarum in the Senate or the House. Most of Congress was away on Christmas vacation and both acts were passed, midnight of Dec 24th, 1913, and signed the next day by President Woodrow Wilson. Wilson had been wooed and primed for this financial coop of the government, which he later regreted. Most people have no understanding of the Federal Reserve, falsely believing it's a "federal" institution. The fact is the Fed is not federal and there are no reserves. The Fed is owned by domestic and foreign banking families, that don't have our best interest at heart. It was telling when the Congressional banking/finance committee asked Bernake where all the money went that was coerced out of Congress, by threat of martial law by Bush and by promise of better days by Obama. Bernake stated that "I don't know where the money went and I don't have to tell you." Now, those are pretty bold words. In other words, he told Congress, who supposedly holds the purse strings to our Treasury, 'I don't have to tell you anything, even though the money came from the tax payers." He quoted the Federal Reserve Act of "1914 (didn't even know it was 1913)" as his legal stance for not having to tell Congress, anything. Ron Paul's idea of ending the Fed isn't just a good idea, it's the only thing that will save this nation's economy. Please remember the warning from Thomas Jefferson, which was "Banks are more dangerous to this nation that standing armies." He went on to predict that banks, left unchecked, would leave our childrens' children penniless on the continent that their forefathers had conquered. It's time that Americans educate themselves about our banking system. It's like folks that say they're not interested in politic, but politics is intersted in you. So it is with our banking system.

  • Report this Comment On September 03, 2012, at 5:11 PM, dialysisjoe wrote:

    In order to understand the history of the Federal Reserve, I would recommend Ron Paul's End the Fed. As well, I would strongly recommend Jim Marrs' book, Trillion Dollar Conspiracy. We've turned into a nation of dullards, mesmerized by the latest technogadget, television, sports and movies. As well, real news is a thing of the past. Now, the news is one giant infomercial for what ever crap is being pushed on the public, that day. It has more to do with celebrities and their lives, as opposed to what's really happening in our world. You have to seek real information, because you're not going to get the truth in the mainstream media.

  • Report this Comment On September 03, 2012, at 5:14 PM, which2 wrote:

    About the "recovery" or "non-recovery". I clearly recall the stories my Dad told of the widespread unemployment during the depression years. Dad was always able to be employed, but my uncles, both his brother and Mom's brothers were not (about 6 of them). It took WWII before employment really picked up after the crash of 1929. For over 10 years the economy was a real mess, unemployment was high and there was a lot of homelessness, hunger and pain. Why do we expect to be out of this financial gully we are in within just a few years? If history is a guide, then maybe it will be another 5 to 10 years before the world gets it's economic feet under it and starts expanding again. And with the level of bickering between the political parties, it may take longer than that! Just for once, I would like to see our Congress work for the best of our country and not the best of their party and power.

  • Report this Comment On September 03, 2012, at 5:16 PM, topbeancounter wrote:

    There can't be that many folks with short term memory loss, but each time I read that "Obama did it to me", or some variation of that theme, I realize I can't be correct.

    Does no one remember Senator Mitch McConnell standing in front of the rolling cameras stating that he and his buddies in the House and Senate will block everything that the new president will present? I sure do. It made me sick. It still does.

    As an independent, I have voted for as many GOP candidates as Dems. I want the best man for the job, and clearly Obama was the choice in lthe ast election, even though I have a great respect for the GOP candidate, just not the fool he selected for VP.

    If you don't like Reid and Pelosi, vote 'em out. Add Mitch and that tanning specimen in the House while you're at it. Whether you would like to admit it or not, this is all about good 'ol fashion racism. We let one get in, but that's about it. Nonsense.

    If you think bringing the country back under the current choices from the GOP, good luck with that thought. They are both delusional and clueless. Mr. Ryan is too stupid to realize he is responsible for the same bills that he is now blaming the other side for presenting. Is he that arrogant to think that no one is watching?

  • Report this Comment On September 03, 2012, at 5:31 PM, PositiveMojo wrote:

    Sorry, don't agree. The banks and the American consumer being "over leveraged" got us into this fix, and then the government poured gas on the fire by the wasteful trillion dollar stimulus and onerous regulations.

    Just ask the folks at Merrill Lynch what happened. You cannot take on that much debt and stay healthy or survive. Not a bank, not a citizen.

    The deposits have increased because people have fled the stock markets and have to put their money some place. A large chunk was pulled out just 8 weeks ago: http://buzz.money.cnn.com/2012/06/21/investors-keep-fleeing-....

    What we are seeing now is the recovery from a drunken binge, that is being further aggravated by extremely poor fiscal management by the current administration. You can spend a trillion dollars with nothing to show for it and not expect it to have a huge impact.

    By the way, check out the reason why 4,800+ people lost their jobs this year at MetLife Bank. It had nothing to do with money, or the lack of it being loaned. It had everything to do with regulations.

  • Report this Comment On September 03, 2012, at 5:32 PM, altrue1090 wrote:

    The recovery is slow because the Baby Boomers are aging. 70% of the economy is based on consumer spending. Old people don't need to buy houses, cars, furniture, refrigerators, etc. There aren't enough young people to take up the slack. The only cure for this is an infusion of young, skilled, educated people from other countries to come and fill the high tech and skilled jobs that are open right now, and then to spend that money.

  • Report this Comment On September 03, 2012, at 5:35 PM, dialysisjoe wrote:

    Joseph Kennedy was the first Chaiman of the SEC. Right before the crash of 29, he pulled all of his money out of the stock market. How did he know trouble was on the horrizon? He had inside information. He knew that the Fed was going to throw the USA under the bus. The banks had conspired to loan money to folks buying stocks, on the margin and then called in all the loans. After the market crashed, these same banking families bought stock pennies on the dollar. They broke the nation's financial back and became a hundred times richer than they were before hand. Anyway, Joe Kennedy got out of the market and not only savee the family fortune, but enriched himself many times over, while the average guy suffered horribly. The banking families are not our friends. To them, we are all just sheep to be sheared. They have about as much concern for us and we would a bug. As for Congress or the President, these families own them. They will never see office without them. That's how powerful they are.

  • Report this Comment On September 03, 2012, at 5:35 PM, PositiveMojo wrote:

    BTW - The problem in Europe is not a credit problem, it is a "too much debt" and "out of control spending" problem. Too much credit is what got them into this mess.

  • Report this Comment On September 03, 2012, at 6:15 PM, timomimo wrote:

    The major way banks attract (or discourage) loans is by the interest rate. Interest rates are at all time lows -- and still loan demand remains low. The problem is not with banks. People do not feel comfortable in this jobless economy -- the only solution is to change the leadership in Washington and give a businessman a chance to do what the current administration has failed to do.

    In summary, don't blame the banks.

  • Report this Comment On September 03, 2012, at 6:22 PM, cp757 wrote:

    Barack Obama has stabbed Democrats and Independents in the back. If Hillary Rodham Clinton wins the presidency in 2016 do you think she would make Barack Hussein Obama II Secretary of State.

    In 2009 Barack Obama on ‘The Today Show’ was asked about what he’d do, how he’d measure his success, and he said: ‘Look, if I can’t turn the economy around in three years, I will be looking at a one-term proposition.’ And he’s right; he is looking at a one-term proposition because he wanted ObamaCare instead of Jobs for the people. He’s going to be saying today that he wants four more years. Why ?

  • Report this Comment On September 03, 2012, at 6:26 PM, cp757 wrote:

    1. Net jobs created is a negative.

    2. Participation in job market at an all time low.

    3. Unemployment at historic long term high.

    4. Family income declined from $55,000 to $50,000 in Obama's 1st term.

    5.National debt will exceed $16 trillion--over a third run up in the last 4 years.

    6. 23 million unemployed or under employed

    7. Nearly 60% of jobs created in last four years pay less than $13/hour.

    8. Half of all college grads cannot find jobs that they have trained for.

  • Report this Comment On September 03, 2012, at 6:27 PM, xetn wrote:

    What makes you thing that businesses need to borrow? What makes you think that banks are not lending?

  • Report this Comment On September 03, 2012, at 6:32 PM, cp757 wrote:

    Bill Clinton will speak for Obama at the Democratic Convention but not from the heart. Obama has emerged as the leader of a new, anti-Clinton wing. His argument's have blossomed into a full-scale criticism of the Clinton Presidency. Obama's target was another Presidential aspirant, Hillary Clinton, who, Obama argued, was too polarizing to get anything done in Washington.

    Obama soon added a harsher note to the argument: that Hillary, perhaps like her finger-wagging husband, was untrustworthy. Obama’s advisers, in a private memo before a pivotal speech in Iowa, laid out the strategy. “Clinton,” they argued, “can’t be trusted or believed when it comes to change,” because “she’s driven by political calculation, not conviction. They gave her a plum spot but now Hillary won't speak at "Obamas convention."

    Maybe Hillary thinks Clint Eastwood had a point.

  • Report this Comment On September 03, 2012, at 6:35 PM, cp757 wrote:

    Hillary Clinton, is missing the Democratic convention for the first time in her adult life and she will not speak. Vice President Joe Biden will be able to speak and said he would stand next to any empty chair at the convention.

  • Report this Comment On September 03, 2012, at 6:40 PM, rosalindr wrote:

    Topbeancounter is correct in his recollection of Republican obstructionism towards Obama. Obama mistakenly believed that if he proposed solutions based on previous Republican concepts, like Romneycare, Republicans would cooperate. The more he moved to the Right, the more Republicans and their media mouthpieces called him a Socialist, a Communist, or a Nazi.

    The "GOP" has been taken over by Dixiecrats, Tea Partiers, and the superrich (no they were always there). This is not my father's or even Ronald Regan's Republican Party. All of the moderate Republicans have been pushed out. Maine Senator Olympia Snow is a good example of a popular politician who couldn't deal with the partisanship anymore.

    The sad and scary part is if Obama wins in November, I'm afraid these mean-spirited Republicans would be willing not only to throw Obama over the fiscal cliff but everyone else except themselves and their wealthy supporters. I'm not sure if the nightmare scenarios painted by other investment bloggers would come true, but it sure wouldn't get better and they could all blame Obama again.

    While I hate to see these Congressional brats rewarded for their juvenile behavior, I'm coming to the conclusion that the only way out of this mess is for Romney to win. Democrats may be disorganized and wasteful but at least they are willing to work with a Republican President for the good of the country.

    Romney isn't a bad guy and he will become more moderate if elected. After all he is a shape changer.

  • Report this Comment On September 03, 2012, at 6:42 PM, rojostyle wrote:

    I love the clowns that blame a slow or no recovery on one person. They should lose freedom of speech as far as I am concerned.

  • Report this Comment On September 03, 2012, at 7:11 PM, colleran wrote:

    A personal anecdote. When I got the original loan on my current house in 2005, all I really needed was a good credit score. I recently attempted to refinance it with the same credit score. The underwriter wanted my last two years income tax, my divorce consent decree from ten years ago, W-2 forms and other documentation that I can't even remember. I finally gave up.

  • Report this Comment On September 03, 2012, at 7:11 PM, alsinaiyah wrote:

    And here I thought the reason businesses were not spending and investing capital was attributed to an uncertain view of future taxes and regulation. When Congress passes legislation having a 6 to 9 month shelf life and many, if not most, businesses have 3 to 5 year planning cycles, there is no future in guessing what the next round of regulations and taxes will be. Therefore, the safest course of fiscal responsibility is to do nothing... don't invest, don't hire, don't expand... simply wait until the future becomes clearer. After all, it is a very easy story to tell stock holders.... while we didn't do anything, neither did we act fiscally irresponsible.

  • Report this Comment On September 03, 2012, at 7:29 PM, ejrad wrote:

    What specifically did Obama NOT do that should have been done. Not Romney nor any one has a specific answer, as what they would have done.

  • Report this Comment On September 03, 2012, at 7:51 PM, daves65 wrote:

    I can't get over the liberal coverup motley fool is alway covertly trying to do for an incompentant userper an chief. Every time i read this kind of crap i consider dropping their service. Why can't they at least stay out of politics, if they can't tell the truth.

  • Report this Comment On September 03, 2012, at 8:31 PM, ELPY2 wrote:

    60 years ago I said about public education. We couldn't do it ,if we could afford it and we couldn't afford it if we could do it. Nothing has happened to change my mind, except that the public schools have gotten worse after our spending so much money, and Liberals say we did not spend enough.

  • Report this Comment On September 03, 2012, at 8:33 PM, ELPY2 wrote:

    I also thought that Liberals were the curse of mankind

  • Report this Comment On September 03, 2012, at 9:18 PM, looneyfooler wrote:

    I think you are wrong. There is NO recovery in progress.

    obama and the dems have brought us to the brink of complete and total ruin and will continue to do so if they remain in power.

    The government is the cause of our problems-NOT the solution. Higher taxes, contant new regulations, spending far beyond their means, wasteful spending, corruption, bigger & bigger government, too many lawyers, lack of business and "real life" experience, and the list goes on and on and on...

  • Report this Comment On September 03, 2012, at 10:06 PM, rbraseth wrote:

    How refreshing to read the posts on this board. Y'all are about 10 times more thoughtful and open minded that the folks at the Wall Street Journal. There is civility even when people disagree strongly. People with strong opinions actually hear what the other person is arguing. I know where I'm coming for thoughtful commentary. Right here with a bunch of Fools. Thank you all. ralph braseth

  • Report this Comment On September 03, 2012, at 10:18 PM, ddunlop421 wrote:

    I have no great love for banks, so I am not defending them for their past sins. But, From my limited perspective here in the middle west, it is not because they will not loan. I am the part owner of a small business that could expand, but will not right now. We have no idea what will be happening with healthcare, taxes, energy costs, unexpected EPA directives, unemployment costs, workman compensation costs. and a multitude of other regulations that could down from "above". It is not prudent to borrow under these circumstances, even at todays low interest rates!

  • Report this Comment On September 03, 2012, at 10:53 PM, wheelen15 wrote:

    There is no recovery, there is a gradual shift to adjust to the destruction of the nations economic

    infrastructure that began with the "breaking" of the air traffic controllers union by Ronald Reagan

    and continued on with NAFTA and many other actions by or allowed by the government , The over hyped w2k effect and the underdeveloped internet kept employment intact in the nineties which stimulated consumer spending and real estate. Dot Com bubble cooled things a little for a segment of the hot shot investment community but the IRAQ War started by one if not the worst presidents in history ,along with the "send all the jobs overseas mentality"and the "world economy" bs have destroyed the country. And while Obama hasn't "fixed things" , he certainly hasn't been the source of the problems. Both Parties and Big Business , have taken the people of the United States "for a "ride" to state it with some civility

  • Report this Comment On September 04, 2012, at 12:00 AM, EBStroke wrote:

    "Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon"

    by Gretchen Morgenson & Joshua Rosner

    This is hands down the best book of the dozens that were written about the causes of the 2008 crash.

    It is a 'must read' by every voter before the election in November, whether you are a Democrat, Independent, Republican, or a Whig.

    Mike.Legge aka EBStroke

  • Report this Comment On September 04, 2012, at 12:11 AM, enginear wrote:

    -high (and persistent) unemployment

    -regulatory requirements for higher capital ratios

    -falling housing prices (still!)

    -the (healthy) 'deleveraging' that is going on

    If you're a bank, are you going out of your way to lend using the practices employed during the pre crisis years, or is a bit more prudence in order?

    Perhaps if they saw a little investment from corporate America they'd feel a bit better, but all those record profits (of the post crisis time - they're shrinking now) are still on the balance sheets. Banks want their own balance sheets to end with a positive number too.

    A bit too simplistic... its not just the banks, its all of us; banks, business, individuals. If nobody is willing to put any money on the line, the economy will shrink.

    I would like to see more useful capital and less consumer garbage (more infrastructure built, even if it comes at the expense of less Netflix subscriptions or high end Nike shoes sold). We seem to have forgotten that there is more to an economy than personal satisfaction

  • Report this Comment On September 04, 2012, at 12:12 AM, EBStroke wrote:

    Mr Maxfield;

    With all due respect, I believe that banks are only a small part of the problem.

    A focus on the 'capital strike' (if there is such a thing) might provide richer explanation of the jobless recovery. My best guess is that the problems are structural in nature and possibly immune to both fiscal and monetary fixes.

    It may be all about CONFIDENCE.

  • Report this Comment On September 04, 2012, at 1:10 AM, depsee wrote:

    A very stupid articular in my opinion. This writer tried to conclude that all the problems have nothing to do with the politics but just the simple fact that banks are reluctant to give loans. Has this stupid person considered the possible fact that the reason the banks don't wont to give loans IS the current politics

    I don't understand this persons thinking.

  • Report this Comment On September 04, 2012, at 1:25 AM, SisyphusRocks wrote:

    I second many of EBStroke's comments, particularly his endorsement of "Reckless Endangerment."

    But I am surprised to see no one mention a factor that many economists point to, which is the unusually small growth in the money supply (including lines of credit) since early 2008. That's all on the Fed. When the Fed first added interest on bank reserves held by the Fed, the market crashed more than the day Lehman was first revealed to be insolvent. The sophisticated players understood what had happened, even if few normal investors and even many economists did not.

    Some economists, such as Scott Sumner, believe that the addition of interest paid on reserves severely weakened the transmission mechanism of money lent by the Fed to productive businesses via the banks. Banks now just sit on the reserves - more than $1 trillion of them currently. So while the near-zero interest rates and QEx make it seem like we have loose money, most of that new money doesn't make it into the economy, as evidenced by the slow growth in the money supply and below historic trend inflation.

    Incidentally, Milton Freidman and Anna Schwartz showed that the Great Depression was largely caused initially by an overly tight money supply. We should not be surprised that the Great Recession was caused by the same thing. Until policymakers act to fix it, we will suffer from the same problems.

  • Report this Comment On September 04, 2012, at 2:21 AM, CathrynMataga wrote:

    Banks don't lend because they're not crazy. By keeping all these bad loans on the books and not putting all the houses on the market, they've kept home prices from falling as low as they might have. But by doing that, they've destroyed the value of houses as loan collateral. If the market is teetering on another collapse if the unseen inventory comes out, who wants to accept a house as loan collateral for a 30 year loan at 3% interest?

    We need to unlock all these foreclosed houses, get them on the market or give them away or whatever. Then the housing market can find a real bottom and growth can begin again. Until then, we're screwed.

  • Report this Comment On September 04, 2012, at 3:09 AM, Kerroj wrote:

    Loved your response Zankudo!

  • Report this Comment On September 04, 2012, at 6:44 AM, JimmyZangwow wrote:

    Sometimes the articles on here remind me of stuff I read on "The Onion". Headlines like "Area Man Single-handedly Caused 2008 Financial Meltdown." Stop trying to identify "that one guy" (or gal, or organization, or country...) who can be shown to be the cause of this whole mess.

    What caused this thing we need to "recover" from was a widespread, misplaced faith in the idea that genuine wealth always increases with each successive generation. There are LIMITS to growth, and everyone knows it. But most do not want to consciously acknowledge it, because it is like, a total buzzkill. It's way more satisfying to look for an easy source to blame than to acknowledge personal lack of foresight.

    The truth is when we have adequate shelter, food, clothing, and transportation, we've got it pretty great. But try getting that through people's heads when they have five credit cards, a salary that goes up every year, and advertising media on steroids.

  • Report this Comment On September 04, 2012, at 7:04 AM, ravens9111 wrote:

    This is about business lending, not consumer lending. With that in mind, it only makes sense that small business is under attack. They don't know what burdens will come their way. When business has too much uncertainty, they don't expand. They will "wait and see" how these new regulations and burdens will affect their business going forward when implemented. Small business is the major driver of a free economy. When the rules change by the government, small business is ill equipped to get around the rules unlike big business, who have million dollar lawyers and CPA's to avoid new taxes and regulations. How else do you explain big business moving operations overseas? Small business can't do that.

    However, when greater certainty and confidence is restored with a new administration, small business will then be able to visibly see the costs when expanding their business. Banks on the other hand are hoarding cash because the risk/reward is not in their favor. If you were a bank, would you rather lend money at 4% or 8%? Although these commercial loans are still packaged as CMBS, these loans are not guaranteed by the government.

    If the government wants to increase the scope of business lending, then it would make sense to temporarily ease underwriting standards for SBA loans. Currently, SBA loans are limited to certain transactions and are not competitive with conventional commercial loans. Everyone I know says they opted not to do an SBA loan because it didn't make sense due to its cost and did not provided any benefit whatsoever.

  • Report this Comment On September 04, 2012, at 8:03 AM, Snertie wrote:

    The recovery is so slow because the "recovery" was done 2 years ago. The President wishes to "fundamentally transform America" to a European-like socialist democracy. Well, 2% growth and 8-10% unemployment is standard performance for European-like socialist democracies.

    This is the "new normal" America voted for in 2008. Get used to it.

  • Report this Comment On September 04, 2012, at 8:15 AM, carjjc wrote:

    This article makes sense but the real blame is on the Government.

    I do not see how any Company would want to invest when the Republicans have decided not to govern. Then there idea of cutting the budget and increasing the debt by a give away tax cut to the high earners (no job creaters here). Then tax increases on the middle class and poor reducing demand. The problems are the republican policies and actions. When the possibility of these go away the economy will recover. The balanced approach of President Obama of fair tax reform and spending cuts is the correct answer for our economy.

    The great economy of Reagan was because of his very very high spending not his tax policies.

    We need spending on infrastructure just like Obama proposes.

  • Report this Comment On September 04, 2012, at 12:10 PM, eldetorre wrote:

    The recovery is slow because our economy has changed and old fashioned stimulus can't work.

    Manufacturing, when it happens here, is just in time, with just enough labor.

    Too many jobs are outsourced.

    Middle class PER CAPITA income has been going down for years. The only thing keeping household income from tanking over the last twenty years was an increasing number of dual income households.

    Why do people keep forgetting that 2/3 of economic activity is in the consumer space not business space?

    We need an expanding middle class with some disposable income. Trickle up economics not trickle down. It's time for enlightened self interest.

    Tax policy just increases the bottom line for businesses. It doesn't give them any incentive to spend if they can't move the inventory, or sell the services they can already provide. Businesses invest to respond to demand. There is no demand because consumers are tapped out. None of the proposed tax policies change this! The only tax policy that might is a tax policy contingent upon the net creation of jobs, or net increase in capital spending. A tax break in mere hopes that business will elect to hire or spend is pointless. Reward actual net hiring and spending!

  • Report this Comment On September 04, 2012, at 12:29 PM, mountain8 wrote:

    ejrad,

    "What specifically did Obama NOT do that should have been done."

    I don't think what Obama did NOT do is of no importance. What is important is that what he has done, has had no discernable effect. Therefore, let's let somebody else try their ideas. They will be different, obviously, but there is still no real reason to believe they might or might not work.

    Problem is the problems now are so convoluted that I don't really see them straightening out very well for the next couple of presidents.

  • Report this Comment On September 04, 2012, at 12:32 PM, mountain8 wrote:

    please change "do is of NO importance." to "do is of ANY importance."

  • Report this Comment On September 04, 2012, at 12:56 PM, yardomd wrote:

    I cannot even payoff the mortgage principal with cash. The mortgage has been bundled and re-sold so many times, that the owner is unknown.

    One way to resolve it, is to re-finance with a reputable bank, for example Wells Fargo, then pay it off and move on.

  • Report this Comment On September 04, 2012, at 1:40 PM, steve411 wrote:

    ETFsRule wrote: "You didn't mention the fact that there is simply less demand for loans. "

    I couldn't disagree more. I know plenty of owners and developers that have been working on financing to expanding and renovating facilities only to be put off by banks. I've been underemployed since March when my back log of very successful projects exhausted. There are plenty of projects "shovel ready" but no financing from the banks big enough to make the deal.

  • Report this Comment On September 04, 2012, at 3:35 PM, kmtominey wrote:

    Banks are not alone in sitting on tons of cash waiting for demand to reappear. The republicans are heavily to blame for this as they have fought every effort to invest in infrastructure which does create jobs and demand. They have also - irresponsibly - campaigned for energy development without requiring that oil resources from the USA or passing through to gulf coast refiners like the tar sands oil to stay in this country which would reduce gasoline costs a lot.

    Ridiculous to put the Ogala Acquifer at risk so that a notoriously poorly managed Canadian pipeline firm can run toxic oil mixtures to the gulf coast for export to China and others.

  • Report this Comment On September 04, 2012, at 5:25 PM, eldetorre wrote:

    "Therefore, let's let somebody else try their ideas. They will be different, obviously, but there is still no real reason to believe they might or might not work."

    There are plenty of reasons to believe these so alled ideas won't work. Because they've been tried before and have never worked before!

    The only thing that can work is increasing the incomes of a broad swath of potential spenders so that they can spend.

  • Report this Comment On September 04, 2012, at 5:39 PM, thefactsare wrote:

    the last statement is right on. also the pipeline is built in chaina and the oil actualy is thick and is abravsive as to the sand condition. therefore it must be heated and pumped under very high psi.and this is one reason canida does not want the risk of moving it in there homeland.

  • Report this Comment On September 05, 2012, at 12:57 AM, 48ozhalfgallons wrote:

    tkell31:<<There's only so much spending the super rich can do. All those trillions in "stimulis" went right from the printing press to the bank accounts of CEOs and people friendly to each party. 60% of the country continues to see their real earnings decrease in the face of inflation.>>

    Valid observation: So the rich will run for office and rule third world countries. If income disparity continues, one will only be considered rich if he has a private military at his disposal.

  • Report this Comment On September 05, 2012, at 4:24 PM, Krelman wrote:

    All of these comments and not one mention of two useless wars "made up" by the Bush administration and continued senselessly by the Obama administration?

    If we had put the money from two useless wars in to the infrastructure of our own country over the last 11 years, we would have schools, bridges, and repaired roadways; and we would have paid all that money to teachers, bridge builders and road workers in thus country.

    Just think of our recovery if we had spent that money here on our workers improving our country.

  • Report this Comment On September 05, 2012, at 5:54 PM, crackdclaw wrote:

    It's rare that I read an op-ed on the Fool. Every time I do it appears they are written by a recent college graduate with no real world experience.

    To build the premise of a slow recovery on banks not lending is sophmoric naive. Then to show a graph with deposits increasing and loan amounts decreasing as evidence, should receive a fail on the Econ 101 term paper.

    There are many examples in the posts above, but after a quick review I'm not sure if anyone touch on deposits at banks increasing as consumers became more risk averse and moved money away from equities.

    Really a foolishly written articel that wasted my time.

  • Report this Comment On September 06, 2012, at 1:16 AM, Minow wrote:

    Its funny how quickly people forgot the last 4-years leading up to this election, but their also hell bent on assigning blame! America knew Obama had no experience and voted him into office anyway, because the alternative or the republicans is what got us into this mess in the first place. The Global War on Terror, Iraq and Afghanistan Wars, so I guess The Financial crash of 2008 (credit default swaps) and too big too fail was a myth and less regulations is a good thing! Some people just can't or won't use their mind's eye to envision where we've come from, which was the brink of a disaster or near depression and the worst ongoing recession in history! The republicans didn't want to help Obama, because helping Obama would go against what some called an experiment-- Obama being the first black president, besides the substandard help that Obama did get was from the likes of Timothy Geithner, Larry Summers and other people less qualified to be in their positions, as we witnessed those members vacate their seats. I only wished that Obama would hold someones accountable and stop constantly blaming The Bush Administration for the mess he inherited...which was a mighty task placed before him!

  • Report this Comment On September 06, 2012, at 5:01 PM, x3470 wrote:

    All the above comments are intersting. Only one thing wrong. If you missed Clinton" address last nite, you would understand the problem.

  • Report this Comment On September 07, 2012, at 12:14 PM, netprophet100 wrote:

    This artilce pins the blame on the outcome not the cause. Banks are not lending because of one reason - risk. Risk is too high with impending Obamacare rules and taxes, increased regulations, the largest tax increase in history will go into affect next year and destory even the meager growth we have.

    Regarding other comments:

    Less than 30% of the high risk mortgages ever made it to Wall St. The financial collapse was the result of a Ponzi scheme orchestrated by the government via the Community Reinvestment Act to get people who should have received loans into homes. Banks collected the fees and handed the loans over the Fannie and Freddie. This went unabated for some 15 years because there was little default on these obligations in a growing economy. The percent of loans that were high risk from from 3% in the early 90's to over 50% by 2006. When interest rates ticked up and the economy started to slow, the house of cards collapsed.

    Obama sought to solve the problem with stimulus which according to the Congressional Budget Office created a meager 0.3 and 1.9 million jobs at a $831 billion price tag - that is, between $430,000 and $2,100,000 per job! Obama did not bail out the auto industry as VP Biden lied about last night - he bailed out the United Suto workers and trashed the creditors. Finally, you simply cannot pin lack of cooperation on the GOP. Obama had the Democrats controlling both houses for 2 years and his own party unanimously rejected his own budget. Obama is nothing but a schemer - he said he wanted to cooperate, but every one of his policies have been anything but compromise. In contrast, many of Bush's policies were bi-partisan including the two wars which Joe Biden, Hillary and John Kerry all voted for. Don't blame Bush. Putting that money into roads and bridges would have done zero to grow the economy just as the stimulus didn;t.

  • Report this Comment On September 07, 2012, at 1:37 PM, chris293 wrote:

    It took time for the effects of the gutting of Glass-Steagall Act under President Clinton to be realized by another adminstration, toss in 9/11 and the middle east wars and what do you and i get, a financial mess that needs business minds to clean up not do gooders feeling our pain.

  • Report this Comment On September 07, 2012, at 4:40 PM, jhsblue wrote:

    Personally, it appeared to me that banks lost their ability to evaluate risk as they began "selling loans" (we actually heard someone in a bank use that expression). They viewed nothing as risky and gave everyone loans. Then, when the bottom fell out, they viewed everything as risky and held back.

    More recently I've heard that the problem is that people/businesses that need loans can't get approved for them, while people/business who could get approved for a loan don't need one. So loosening monetary policy doesn't help goose the economy like it used to.

  • Report this Comment On September 08, 2012, at 12:15 PM, Harley117 wrote:

    The main reason the recovery is slow is because you have 76 million baby boomers who have passed their peak spending and earning. The banks are just responding to the environment of increased regulation and many other uncertainities.

  • Report this Comment On September 09, 2012, at 2:32 AM, bjdweck wrote:

    What about...

    1. The FED putting a price ceiling on the price of money (i.e. the interest rate) of almost 0%? Such a policy results in a shortage of any good or service on which it is applied...

    2. The FED, for the first time in history, giving the banks an incentive to HOLD their deposits at the FED by paying them interest on them?

  • Report this Comment On September 10, 2012, at 9:51 AM, RonEJones wrote:

    A simplistic reason is that the middle class (you know, the American Dream) has not had an increase in disposable income for a decade. Consumers drive growth, not investment in manufacturing. If you want to see spending, make more money available to the guy whose wife just gave birth to twins and he's living in a one bedroom apartment. Do not give additional income to a person who has all the money he needs and has already bought whatever he wanted.

    --- a former Republican

  • Report this Comment On September 11, 2012, at 11:42 PM, thidmark wrote:

    How the hell has there been "Republican obstructionism toward Obama??" He started his term with a Democratic House AND Senate.

  • Report this Comment On September 19, 2012, at 3:10 PM, NobodysFool666 wrote:

    There are so many reasons for what is occurring I find it difficult to believe that anyone could try to limit it to banks. Like other businesses, if there is little demand for their product or service they will not produce it. And when someone does demand it then the banks have to jump through regulatory hoops to accommodate the demand. Moreover, businesses are not demanding credit anymore than consumers are demanding product and therein lies the entire issue. No demand, except for more public union employees and tax hikes. But politics - and the deficit/national debt aside - the aging of America is also a large factor. 10,000/day reach the age of retirement - spending less, investing less, and working less; this hurts the economy through less demand for goods and services, the capital markets through less saving, and the government through less tax revenue. Add to these issues the same impacts caused by the millions of unemployed who would like to work and it is even worse. And further add to these groups those families that are working and paying down debt and it gets further exacerbated. And when interest rates rise there will be hell to pay because the government interest costs will skyrocket and we'll be borrowing Chinese money to pay them interest on their investment in America. The only answers lie with reduced Federal, state and local government spending; reduced taxes to create incentive; more jobs; reduced healthcare costs because far too many dollars are going into healthcare and healthcare is not an income generating product; reduced entitlements (and yes, I am retired and would accept a 5% cut in my Social Security) through more means testing; and a national energy policy to make North America energy independent so we can withdraw from the quagmire known as the Middle East.

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