Money, money everywhere but in the loan market

With the Fed still buying $120 billion in Treasuries and mortgages every month, short rates still close to zero and real rates solidly negative, the loan market should be exploding with firms and households borrowing to take on new projects and funding consumption. Banks should be willing to lend given the strong deposits and excess reserves. That is the assumption, yet reality is different. 

Reality is different because credit markets are different. Banks will ration credit not on solely on price but on standards for lending and expected risks. If perceived risks are high, the price of credit will not matter. Similarly, borrowing will be based on expected return from an investment project. The discount rate is relevant, but cash flows dominate. Similarly, households will take on more debt only if there is the perception that future income will improve. While central banks can change the cost of credit and the supply of money, these variables may not control behavior in the credit markets. The credit question is always forward looking for both parties. Will the creditor be paid interest and principal, and will the borrower generate enough to pay interest and principal? 

Sustained growth is driven by business and consumer confidence and not just low interest rates. Right now, business and consumer confidence are declining which creates an economic headwind.