by Frank Shostak
Mises.org
After climbing to 12.2 percent in April last year, the yearly growth rate of combined commercial bank real estate and consumer and business loans plunged to –2.6 percent in early March.
[…] For most commentators an important factor in setting economic prosperity in motion is bank lending. Hence, this sharp decline in the yearly growth rate in bank loans raises the likelihood that US economic activity is under strong downward pressure. Consequently, most commentators are of the view that central authorities must provide the necessary support to strengthen bank-lending growth. However, is it true that bank lending is an important factor in economic prosperity?
For instance, farmer Joe, who produced two kilograms of potatoes. For his own consumption, he requires one kilogram, and the rest he decides to lend for one year to farmer Bob. The unconsumed one kg of potatoes that he agrees to lend is his real savings. This example is necessary in order to illustrate that for lending to take place there must be real savings first. Lending must be fully backed by real savings.