There is lots of talk about all of the recent fiscal and monetary stimulus eventually causing an episode of massive inflation but so far nothing. Aggregate demand must exceed supply for inflation to occur. The drop in Consumption, which accounts for 70% of GDP, has been so severe that the fiscal stimulus has been left inadequate to fill that gap. As for the monetary leg of all this stimulus, it has mostly been
much to do about nothing. With the exception of mortgage lending, very little of the new money supply is making it into the economy. Here are two statistics that sum it all up. The Fed's balance sheet has increased $1 trillion dollars since pre-crisis (mostly via the purchases of MBS, Federal Agency Debt and Direct Bank Loan assets) levels. The US banks on the other hand have amassed $1 trillion dollars of excess reserves; about $1 trillion dollars more than they had a year ago. Get the picture. When the Fed begins to unload (sell) all of its assets next year, they will soak up a lot of excess money supply. If the banks and their affiliates are the buyers, the monetary stimulus will have made a round trip without ever stopping at main street. The stimulus that never was.
The banks are making great on all this cheap money and for those few small businesses that are receiving credit; they are beneficiaries too. Much of the discussion and questions at today's Senate hearing with Ben Bernanke related to why banks are not lending to small business more. It was clear that no one really knew for sure but that, the answer is different for each and every bank. The only certainties offered by Mr. Bernanke is that the banks credit requirements are tougher and that, on the aggregate, the credit quality of businesses have suffered since the pre-crisis days. These two things are certainly reasonable and explain a large portion of the gap between money supply and money being supplied but they do not explain all of it. There is an element of human behavior and market friction that keeps otherwise good loans from being made. Asymmetric information or lack of information prevents the right decision from being made. This element is always present but the level of fear and aversion to risk ensure that bankers error to the side of not making the loan. For companies that are at or near the margin, it is extremely important that they instill confidence in their banker by having a well organized plan and having the ability to articulate their vision in the language of bankers - numbers. Bankers want to lend and it is their business to do so but for the moment, they are too nervous.
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