The Econtrarian

We mentioned in our April 2010 U.S. Economic and Interest Rate Outlook [It’s Been A While] that the ongoing contraction in commercial bank lending was an important factor curbing our enthusiasm about near-term growth in U.S. aggregate demand. Declining Bank Loans – Write-Downs or Pay-Downs?

We mentioned in our April 2010 U.S. Economic and Interest Rate Outlook [It’s Been A While] that the ongoing contraction in commercial bank lending was an important factor curbing our enthusiasm about near-term growth in U.S. aggregate demand. But we did acknowledge that our lack of optimism might be misplaced if the cause of the continued contraction in bank lending was due more to write-downs of loans gone sour rather than of pay-downs of loans. We argued that if bank loans were falling because the dollar amount of
write-downs exceeded the dollar amount of new loans being granted, the write-downs were immaterial with respect to new spending. The spending with respect to the bank loans now being written down occurred in the past, when the loans were originally granted. If, however, bank loans were now falling because the dollar amount of pay-downs exceeded the dollar amount of new loans being granted, then this would have negative implications for near-term
aggregate demand. The entities paying down their debt would be cutting back on their current spending.

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