U.S. Bank Lending Falls at Fastest Rate In History

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"The reason the Great Depression became 'great' was the contraction of credit."

David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16%. "Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10% decline," he said.

Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. "The shrinking in banking sector balance sheets renders any talk of an exit strategy premature," he said.

The M3 broad money supply—watched by monetarists as a leading indicator of trouble a year ahead—has been contracting at a rate of 5.6% over the last three months. This signals future deflation. The Fed's "Monetary Multplier" has dropped to a record low of 0.81, evidence that the banking system is still broken.

Both demands for higher capital ratios and continued losses from the credit crisis are causing banks to cut lending. The risk of a double-dip recession—or worse—is growing by the day.

"It is absurdly premature to think of withdrawing stimulus while bank credit is still sliding. To have allowed this monetary collapse to occur a full 18 months after the financial cataclysm is extreme incompetence. . ." said Tim Congdon from International Monetary Research.

Paul Ashworth, U.S. economist for Capital Economics, said certain Fed officials are clearly worried about lending because they slipped in a warning that bank credit "continues to contract" in their latest statement.

Fed chair Bernanke first made his name as an expert on the "credit channel" causes of slumps. It is unclear why he has been so relaxed about declining bank loans this time.

"The reason the Great Depression became 'great' was the contraction of credit. You would have thought that a student of the Depression like Bernanke would be alarmed by this," said Ashworth.

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