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A tighter monetary policy won’t help banks and won’t help you

Peter Crabb: The Economy
Peter Crabb: The Economy

The Federal Reserve is having a liquidation sale.

The most recent minutes of the Federal Open Market Committee show that policymakers are making plans to shed some of the more than $4 trillion in U.S. government debt the central bank has amassed since the housing crisis. This move is part of the Fed’s plans to “tighten” monetary policy as the economy continues to improve.

Depending on how fast the Fed sells off these bonds, interest rates could move higher. But this is unlikely, as there are still plenty of buyers out there for our government’s debt.

According to data from the Federal Deposit Insurance Corp., U.S. commercial banks hold $2.3 trillion in U.S. government bonds themselves. These bonds now account for 15 percent of all bank assets, up from only 11 percent at the end of 2009. Meanwhile, loans to businesses and households have gone from 53 percent of assets to just 54 percent.

So even though bank deposits have risen by $3.5 trillion since 2009, banks are simply lending more to the government.

The low level of private-sector lending is even worse for Idaho commercial banks. Loans as a percentage of assets in our state commercial banks have declined from 70 percent of assets to 62.5 percent, while government debt is up from 8 to 11 percent of assets.

It could be that households are simply keeping more of their money in bank accounts while at the same time businesses reduce their borrowing. It could be that banks have no choice but to lend to the government. It could be that bank regulators are making it too hard for banks to underwrite new loans.

Whichever argument you make, the situation makes the Fed bond sell-off less effective. Tightened monetary policy, with its higher interest rates on both business and real estate loans, is only going to hurt the situation.

The eminent economist John Maynard Keynes once wrote that “economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average businessman.” Unless conditions improve for new businesses to form and existing business to expand their operations, our bank deposits will just end up funding more government debt.

The Fed’s liquidation sale is nothing to get excited about.

Peter Crabb is professor of finance and economics at Northwest Nazarene University in Nampa. This column appears in the April 19-May, 16, 2017, edition of the Idaho Statesman’s Business Insider magazine.