Fed Loans Not Easing Credit Crunch

Banks could very well trip over themselves Monday as they bid on $50 billion in loans in the latest Federal Reserve auction.

But despite this eagerness to accept the government's "liquidity" injections, banks aren't significantly increasing their lending, experts said. In fact, some banks seem to be pulling back even further - for example, Citigroup Inc.'s (C, Fortune 500) last week said that it will scale back its mortgage business.

"It's still not enough to get the banks to loosen their lending terms," said Walker Todd, a research fellow at the American Institute for Economic Research and former attorney and economist at the New York Fed.

Banks have already borrowed a total of $160 billion since the Fed started holding these auctions in December as a way to ease the credit crunch, which began last year when mortgage defaults and foreclosures began to skyrocket. Since then, the crisis has extended far beyond the residential home loans, roiling the markets for everything from municipal bonds to student loans to auto financing.

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This article addresses the "liquidity" that the government says it has and the lack of increase in the bank's lending. Many banks even seem to be decreasing their lending. The Federal Reserve has been holding auctions since December in an attempt to ease the "credit crunch" that began as a result of mortgage defaults and foreclosures increasing dramatically. This "crunch" has grown to include municipal bonds, students loans, and auto financing. This "credit crunch" has even called to securities backed by Fannie Mae and Freddie Mac have been called into question. Because of this, the auctions are anticipated to continue for at least six more months. According to Tom Schlesinger, the Fed's actions are showing a "deepening sense of anxiety." The Fed has taken many steps to ease this credit crunch that the United States's economy is experiencing. Some believe that the problem is not with the liquidity; however, it is with the fear of rising defaults which causes them to "shy away" from offering credit. Another issue facing banks is the low capital standing that they have. Banks and the Federal Reserve have partnered and are making attempts to increase bank's capital standing. If the capital standing is raised, then banks may be more likely to lend money which can begin to reverse the credit crunch.

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