Credit is finally available, but no one wants it

FORTUNE -- Finally, nearly two years after they were bailed out by Congress, big banks are beginning to ease lending standards for individuals and small businesses. But it's not exactly having the reception many believed it would. Just when credit becomes more available, there's little evidence of a surge in demand for it.

Since the financial crisis, banks have been blamed for slowing the pace of economic recovery because of their reluctance to lend. Unlike larger companies that can borrow from bond markets, small businesses and consumers mostly depend on loans from banks. Federal officials have said tight credit has kept households from spending more and small businesses from hiring more.

Now the U.S. Federal Reserve says banks are modestly expanding credit. But the new development, given all its potential, might still do little to improve America's prospects for economic growth -- at least in the near future.

For the first time since 2006, banks are making commercial and industrial loans more available to small firms, with about one-fifth of large domestic banks having eased lending standards, according to the Fed's latest quarterly survey of banks' lending practices recorded during July 2010. This "offset a net tightening of standards by a small fraction of other banks," the Fed noted. Also, for the past six months, banks have continued easing lending to large and mid-sized firms.

What's more, banks also reported that they stopped cutting existing lines of credit for commercial and industrial firms for the first time since the Fed added the question in its survey in January 2009. And as for consumer loans, banks also reported easing standards for approving loans.

Fear of debt

All this would typically be good news for businesses and consumers eager to borrow, but the Fed's report only highlights the depths of America's economic troubles. Credit is available, but demand remains flat. Asked in the July survey how demand for commercial and industrial loans has changed over the past three months, 61% of banks responded "about the same," while 9% said "moderately weaker." While it was good news that 30% responded "moderately stronger," it's not exactly a surge in demand.

Even in a slowly recovering economy, the growing distaste for credit among our debt-weary public has hampered the way for new purchases and investments.

This isn't all that surprising. The latest economic indicators paint a very exhausted consumer: In the years leading up to the financial crisis, he bought too much house and too many cars. He's in burn-out mode - more focused on either saving or paying down credit card debt than buying more appliances and gadgets.

The amount consumers owed on their credit cards during the three months ending in June dropped to its lowest levels in more than eight years, indicating that cardholders continue to pay off balances in the uncertain economy, according to TransUnion's second quarter credit card statistics.

The average combined debt for bank-issued credit cards fell by more than 13% to $4,951 over the previous year. This represented the first three-month period where credit card debt fell below $5,000 since the three months ending in March 2002. Meanwhile, personal savings have risen to 6.4% of after-tax incomes, about three times higher than it was in 2007.

Perhaps what the Fed's quarterly report is really saying is this: There's a growing distaste for credit. The American consumer is the child who ate too much and spoiled his dinner. And even if you hand him his favorite meal on a silver platter, he's just not that hungry.