Banks are lending again

June 17, 2010 – Banks are lending again.  After many months of sitting on their hands while trying to repair their over-leveraged balance sheets, banks are making new loans.  They also continue to buy US government paper, though those purchases tapered off over the past month.

Earlier this year I noted how banks were using their depositors’ money to buy US government paper instead of making loans.  Those circumstances are changing, as is illustrated in the following chart.

From the above chart we can see that bank loans have grown so that they are now essentially unchanged from where they were two years ago.  But the important question for now remains unanswered.  Were these new loans made over the past few months used for productive purposes that could help spur economic growth, or were they simply extensions of credit to help troubled borrowers cope with their existing debt? 

It remains to be seen which alternative caused this growth in bank loans – but hopefully it wasn’t the so-called practice of throwing ‘good money after bad’.