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Lending Institutions Remain Reluctant to Lend

You may have seen a national cable television show titled "Hoarders," which features people who have a hard time throwing anything away, to the point that their homes are piled high with junk.

Likewise, financial institutions now seem to have the compulsion to hoard. Not junk, but cold, hard cash. Even after years of a so-called economic recovery, financial firms are still reluctant to lend at the rate they did before the 2007-2009 financial crisis. The velocity of money in the U.S. economy has slowed dramatically since the subprime mortgage meltdown.

But what about all the easy money the Federal Reserve has made available?

A well-known CNBC commentator referred to the current mental state of those in charge of financial firms as "nervousness."

[The director of a big investment firm] said much of the Fed's new money hasn't found its way to the economy, as financial institutions — the major recipients of easy money — are too nervous to put the capital to work. This nervousness is reflected in nearly $2 trillion of excess free capital reserves. …

[The director] offered an analogy: 'Ben Bernanke flies over your house, he drops $1 million on your lawn. You're so nervous that you put it in your garage. That's what's happening in the banking system. … The money is not being lent or spent, so that can't be inflationary.'

CNBC, Aug. 26

Indeed. It's deflationary.

Former Ludwig von Mises Institute President Douglas French provides more insight as he references a section of the July-August Elliott Wave Theorist in an article he wrote for the Laissez Faire Club titled, "So Where's the Hyperinflation Already?" Here's a brief excerpt:

Ben Bernanke can lead bankers to liquidity, but he can’t make them lend. Bankers haven’t taken the plunge because other regulators are engaging in what Robert Prechter, renowned financial author and stock market analyst, calls “The Hidden War on Credit.”

Laissez Faire Club, Aug. 12

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