The Hill News

One of the reasons banks are less aggressive in lending to the private sector in a recession is that government regulators are more likely to “criticize” risky loans to that sector. Banks with criticized loans are forced to write-down these loans and consequently have less money available to lend.

There are more criticized loans in a recession, so banks have to rebuild their capital by reducing lending and lending only to the safest borrowers. Therefore, in a recession, government bank regulators force banks to be more conservative in their lending to the private sector, which leads the banks to buy more government bonds.

In my more cynical moments, I wonder if the economic geniuses in the Treasury Department, bank regulatory agencies and the Federal Reserve understand that they can force the banks to fund a larger portion of the huge federal deficit with cheap money by criticizing more bank loans to the private sector and crowding out private le! nding.

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