Unfinished business (1): US banks

In a perceptive "Heard on the Street" column, the Wall Street Journal notes that credit continues to contract, despite government stimulus and Federal Reserve monetary expansion. The Journal says that a more thorough restructuring is needed if the US is to avoid a Japan-style "lost decade". 

Bank loans and leases have fallen by 10.5% since the end of 2008 and even 3.25% since the end of 2009. Bank of America’s loans and leases in the first quarter of 2010 were flat compared to last year, despite having a larger capital base.

The Journal speculates that one reason why lending is frozen is that the Bush and Obama administrations, despite capital injections, “didn’t push a wholesale restructuring of bank balance sheets that might have involved big sales of questionable assets, including toxic loans.” It continues:

Such asset sales would in theory speed up asset-price adjustments across the economy and get prices to a level from which they can rise sustainably. Right now, banks and borrowers may feel asset prices haven’t adjusted fully. This adjustment is being distorted in key parts of the economy, which may put a crimp on bank lending for years.

Taking losses now may be painful, but they would clear up banks’ balance sheets and provide more transparency and certainty.