By Frances Coppola

This post by Sober Look caught my eye. It has a lovely chart which shows the considerable shortfall of lending relative to deposits in American banks:

Sober Look 1

This doesn’t look too good, does it? Why on earth aren’t banks lending? After all, it seems they have the money to do so. So what is stopping them?

Firstly, here’s a short explanation of bank lending. Under normal circumstances, deposits and loans are more-or-less equal across the banking system as a whole. This is because when a bank creates a new loan, it also creates a new balancing deposit. It creates this “from thin air”, not from existing money: banks do not “lend out” existing deposits, as is commonly thought. You can see this clearly on the chart. Until 2009, deposits and loans were roughly equal.

But since 2009 there has been a very evident change.  There is a large and growing gap between loans and deposits. So what is causing this? More