The Federal Reserve recently released the results of its latest survey of senior bank officers. Like the economy—not coincidentally—the bankers' attitudes were mixed. Things have improved over the past year. Bankers on balance have shown a greater willingness to extend credit. But still, they remain very cautious. This lingering reluctance to lend, understandable after the losses of 2008-09, offers yet another reason why the economy's recovery has proceeded so slowly and will likely continue to do so for some time to come. Still, there are tentative signs that the environment is easing, certainly enough to support a recovery of sorts.

This caution among bankers has for some time thwarted the Fed's efforts to push the economy forward. To accelerate the recovery, monetary policy makers have given the system ample financial resources for years now. From August 2008, at the beginning of the crisis, to the present, near zero short-term interest rates and two quantitative easing programs have expanded the Fed's balance sheet hugely and poured liquidity into the financial system. Bank reserves, a key liquidity metric, expanded during this time an astronomical 3,428%, 281.4% a year on average. The monetary base, another liquidity measure that counts currency in circulation along with bank reserves, expanded at a rapid 39.2% annual rate during the same time. But because the banks have shown such a reluctance to lend, little of this massive infusion of liquidity has reached the general economy. 

Initially, bankers' fears almost entirely thwarted the Fed. While policy turned the flow of Fed-provided liquidity into a tidal wave, banker reluctance kept it from getting through to businesses and consumers. Lending overall, already down substantially during the recession, continued to fall, dropping an additional 8.3% annual rate in 2009 and 2010 and remaining stagnant during the first half of 2011. Banker reluctance has kept the Fed's liquidity flow so bottled up that even today a disproportionate 94.2% of total reserves stand in excess of what banks need to support their existing loan and deposit levels.