Blame Treasury for the plunge in bank lending.

U.S. banks have few incentives to make business loans, because Treasury Department policies have changed the economics of lending.

These changes have made it more desirable to buy Treasury, government agency, or similar securities than to lend.

The Treasury has killed lending incentives in part by:

* Advocating dramatic reductions in short-term rates while letting the dollar fall - a combination that creates a steep yield curve.

* Supporting the Basel accords on risk-adjusted capital.

* Supporting the creation of a reserving system that in effect allocates credit.

* Breaking down the trust between banks and the U.S. government.

* Discouraging actions the attractiveness of Treasury securities.

* Advocating a system of raising funds for expansion in the private market instead of tapping government-guaranteed deposits.

Dramatic Effect

These policies effectively stifle bank lending to the private sector, instead favoring the provision of monies to the federal government.

The result has been that U.S. banks have reduced their overall loans by $10 billion in the past 12 months while increasing their holdings of Treasury securities by more than 20%, or $101 billion.

A high-level Treasury official told me that my reasoning is flawed. The Treasury's most vital interests are entwined with a healthy and growing domestic economy, he said, and the propositions above fail to reflect this.

The Treasury's view is that banks are not lending because the economy is at the end of a credit cycle and demand for funds is abnormally low. Further, this view holds, bankers …