Wall Street Journal reports further decline in lending

“US lenders saw loans fall by the largest amount since the govenment began tracking such data, suggesting that nervousness among banks continues to hamper economic recovery.”

Lending fell by 3%, or $210.4 billion, the largest decline since data collection started back in 1984. The FDIC also admits that its fund to backstop deposits went negative for the first time.

Why?

Well, if you know a small banker, ask him. I’m sure he will tell you exactly what is going on. As you know, the FDIC visits small and medium size banks regularly and reviews their loans, determining whether they are performing or nonperforming. My friends in the banking business say the definitions have changed, making loans that would have been classified as performing instead classified as non-performing. When a bank has a non-performing loan, it has to set reserves aside from profits (or creating losses). That same money, the profit portion,  is what the bank uses to make the next round of loans.

Word of Warning:

By January of 1930, the stock market had recovered most of the losses from October 29, 1929. And then Washington started doing some really stupid things: increasing loan reserves, restricting banks and imposing trade restrictions. Sound familiar? The government action started a second crash that went 50% lower than the first and our economy did not fully recover until we began building war machinery for lend-lease.