SAN FRANCISCO, CA -- From the International Business Times, initial report on the Federal Reserve's 'quantitative easing' indicates little improvement in lending:
Fed chairman Ben Bernanke's promise that a new round of quantitative easing (QE) worth $600 billion will breathe life into lethargic bank lending and spur growth appears headed for doom.
A new survey by the Federal Reserve has unveiled a disappointing scenario in the credit market: New demand for loans is dropping off, housing demand remains week, more banks have tightened norms for mortgage loans and small businesses' appetite for credit is seriously dented.
Bernanke has said QE 2, through with the Fed will pump $600 billion into the market over the next eight months, will boost economic growth by easing financial conditions and lowering mortgage and loan rates.
“Lower mortgage rates will make housing more affordable and allow more homeowners to refinance,” Bernanke wrote in Washington Post last week. “Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending," he wrote.
However, according to the latest survey of senior loan officers in the county by the Fed, demand for mortgage loans stayed weak and loan applications from small business dropped while some banks eased standards for certain types of mortgage and household loan.
"On this evidence, claims that quantitative easing will lead to a new boom in bank lending look well wide of the mark," wrote Capital Economics analyst Paul Ashworth in a note.
Ashworth says the current scenario proves wrong the assumption that banks expand their lending dramatically given the excess reserves that they accumulate. "In practice, however, lenders remain reluctant to lend and borrowers remain reluctant to borrow, supporting our view that US economic growth will continue to stumble along at around 2% per annum for some time yet," Ashworth wrote.
He points out that though the percentage of banks that said they have loosened lending standards on commercial and industrial loans to businesses improved in the new survey, this has been offset by the fact that there is a renewed tightening of standards for mortgages and that fewer banks are loosening standards on other consumer loans.
"A net percentage of banks reported a weakening of demand in the October survey, not just for business loans, but mortgages and other consumer loans as well."
According to Fed data, overall loans to businesses and households have witnessed a sharp drop since December 2008. While loans to businesses fell to $1.22 trillion from $1.62 trillion, commercial real-estate loans dropped to $1.51 trillion from $1.73 trillion, as of October 27 this year.
Ashworth says it's significant to note that it was mainly small firms which were shying away from loans. "With cheap and copious financing available in the bond markets, we would have understood if larger firms had less desire to borrow from banks. But small firms don't have these alternatives. Instead, it appears those firms are so concerned about the outlook that they are scaling back plans for investment and hiring."
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