Wednesday, November 11, 2009

Money Down the Dumper

Given the events of the last few years, is it any wonder that commercial banks would rather lend to the U.S. government than directly to firms and households?

The latest release of the Federal Reserve’s H.8 “Assets and Liabilities of Commercial Banks in the United States” report indicated that while commercial banks have increased their holdings (by value) of U.S. government securities by 20.45% on a year-over-year basis they simultaneously contracted their total loans and leases by 8.21%, the largest annual decline on record.

Of course, a portion of this government lending will ultimately be doled out to firms and households through Fannie, Freddie, FHA and other government sponsored schemes but given their recent dismal track record at underwriting, it’s not hard to see that there is trouble ahead.