By Jim Saft
With tax credits for house buyers gone and tough new banking regulations on the way, expect lending in the United States to come under significant pressure.
Demand for mortgages, kept artificially high through the end of April by juicy credits for first-time and other buyers, has now crashed and, at least to judge by the fundamentals in the housing market, should stay low. Loans to consumers too will be getting, appropriately, more expensive, at least in part due to costs imposed by new financial regulations, which while if anything not tough enough from a prudential point of view will without doubt make banking less profitable.
Supply of loans to businesses will also be hit, and demand should remain slack.
The upshot is sluggish movement of money through the economy and, believe it or not, a Federal Reserve that keeps interest rates ultra low because of domestic concerns rather than simply because of fragility in Europe.
This is what happens in a balance sheet recession. People and enterprises repay loans rather than borrow and hold cash rather than invest. Money sits idle on deposit with the Federal Reserve rather than multiplying into loans and activity in the economy.