Released October 2, 2009

RALEIGH, N.C. -- Since last fall, the Federal Reserve has poured billions of dollars into the financial system, yet loans from banks haven't increased by a comparable amount. Indeed, by some measures, loans have fallen. So, what's happened to all these dollars?

Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"The technical answer to the question is that the money is sitting in bank's vaults. Banks have increasingly taken that money and they've bought safe government securities and held them.

I think the broader question is: why are banks doing that? I think there are two reasons.

One, banks are still very skittish about making loans. They've tightened standards. This is a normal reaction. We see it happen during any recession, and of course, this is a very bad recession, so I think it's happened to a greater degree.

And secondly, loan demand. That's economic speak, meaning people coming to a bank and wanting a loan. Loan demand is actually down because there aren't as many economic opportunities out there; also because businesses and private households are trying to pay down on their own personal debt. People haven't been going to the banks like they have in the past, wanting loans.

The combination of these two factors, the fact that banks are still skittish and the fact that people aren't wanting to borrow as much, has resulted in total loan volume going down. And it's probably going to stay that way until we see a significant fall in unemployment and a significant increase in economic growth."

--30--

http://www.ncsu.edu/project/calscommblogs/news/archives/2009/10/economic_perspe_460.html

Source: Mike Walden, (919) 515-4671, michael_walden@ncsu.edu