Bank lending collapses, money supply shrinks

The whole idea of bailing out Wall Street was to get the credit markets working again. For that to happen, banks would have to lend.
This strategy has failed.

David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. "Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline," 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 5.6pc 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.
Tim Congdon from International Monetary Research said demands for higher capital ratios and continued losses from the credit crisis are both 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. They seem to have forgotten that the lesson of the 1930s was the falling quantity of money," he said.

Less lending. Less money. Less credit.
Exactly how is the economy supposed to grow in an environment like that?

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another is demand

I wrote up a post on how demand has also collapsed and this is especially true of small business. They don't want to borrow because their sales, business is so down, they can't use what they already have.

I really question a lot of these reports because the consumer is also downsizing on debt loads, simply because they don't want to spend what they know they do not have.

So, is it really banks are not lending or is it people and businesses do not have income?

I think a key is to look at very short term loans, such as those to bridge payroll. But mortgages and credit cards...
hmmmm, maybe auto loans and the denials on those might be a good indicator on the truth of banks refusing to lend vs. people refusing to borrow.

Also, the Fed just raised it's discount window. There is a strong carry trade, where banks were borrowing super cheap money, then literally putting it into EEs as well as Treasuries, making huge profits off of the interest spread.

I don't know if this will affect the carry trade, haven't analyzed it enough.