Actually, they lend the money into creation, up to a limit set, in theory, by their reserve requirements.
In fact the restriction is not related to reserve requirements, because the Interbank market enables these reserve requirments to be bypassed. What restriction there is on credit creation is that based upon BIS 'Basel' capital requirements which restricts the size of the pyramid of credit which may be built upon a given amount of capital. Aka 'leverage'.
The wilder elements of the Austerian tendency of economics are therefore barking up the wrong tree, because 'fractional reserve banking' has long been a canard.
What even well informed people miss is that banks create credit and new deposits not only when they lend at interest but also when they spend on:
(a) staff, management, suppliers and other costs;
(b) acquisition of assets, such as property or T-Bills;
(c) dividends to shareholders.
What is going on with QE is that the Fed and BoE are creating credit and thereby manufacturing new money which is being spent on financial assets.
This simply replaces one financial asset in the system (interest-bearing bonds) with another (zero interest bills). For this money to get out into the system and cause retail price inflation will actually require lending (to the over-indebted and essentially insolvent 90% of the population)or spending (fiscal action). "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
For this money to get out into the system and cause retail price inflation will actually require lending (to the over-indebted and essentially insolvent 90% of the population)or spending (fiscal action).
Spending the same amount of money on renewable energy, charging infrastructure for electric vehicles and upgraded, electrified rail systems would be highly stimulative, as it is capital spending. Revise policies to bring as much domestic manufacturing as possible back to the USA as is possible, as quickly as possible, and such spending could fuel a boom. Steve Keen has a dynamic simulation of a three sector economy with a government sector, a banking sector and a business sector which he used to demonstrate that the same amount of spending directed to the private sector was much more stimulative than when directed to the banking system.
But we know the problems getting to the point where we can do something sensible. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
