Why Banks Are Not Lending

You’d think that a few hundred billion dollars pumped into the economy as a stimulus would find a place to go.  Like maybe business or consumer loans.  Funny thing, though, it appears that the money may be going elsewhere–to government.

No one was more shocked than me upon learning that banks can make money essentially risk-free by taking the interest rate spread between borrowing from the Fed and lending to the government.  Goodness!  How did that happen?

Don’t feel bad if this is confusing.  It just means you are sane.  The gist of all this is that we can now have money that is created out of thin air by the Federal Reserve put to work for the government, which creates nothing of value.  In other words, we can inflate the money supply in the name of growing the economy when in reality we are growing government.

Looks to me like we are the ones being “stimulated.”

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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