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Tight Credit is Throttling Consumer Spending, U.S. Fed Says

Bankers' reluctance to lend to people with less-than-pristine credit histories is restraining the U.S. economic recovery by holding back consumer borrowing and spending, new research from the San Francisco Federal Reserve Bank shows.

Bankers' reluctance to lend to people with less-than-pristine credit histories is restraining the U.S. economic recovery by holding back consumer borrowing and spending, new research from the San Francisco Federal Reserve Bank shows.

The study, published on Monday in the regional Fed bank's Economic Letter, adds to evidence that tighter credit, not just consumers' reluctance to pile on more debt, is impeding household spending.

Banks are particularly unwilling to lend to borrowers who have defaulted on mortgages or have low credit scores, San Francisco Fed senior economist John Krainer found.

The findings suggest that policymakers who aim to foster growth should strive not only to keep borrowing costs low but also to find new ways to induce banks to lend.

If banks are unwilling to make loans, Krainer wrote, policies that "attack bank financial problems directly or help consumers qualify for stricter underwriting terms may be appropriate, along with the traditional monetary policy prescription of lowering interest rates."

Copyright 2012 by Reuters. All rights reserved.

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