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What's the sense of lower interest rates if banks refuse to make loans?

That's the question that many Americans are asking. The problem is that banks are using lower interest rates to bolster their balance sheets rather than to extend credit to credit-worthy borrowers.Over the past year, banks have increasingly chosen to invest in Treasury bonds, which present no risk and pay interest at 6 percent to 8 percent, rather than engage in the more profitable but decidedly more risky activity of making loans.

Banks are getting fat off this strategy while cash-strapped small businesses and real estate developers are starving for credit.

In the past year, total assets of commercial banks have increased by 5 percent - a total of $182 billion. Banks have increased their holdings of government securities by a whopping 21 percent. In actual dollars, that increase amounted to $95 billion.

No wonder banks had no money to loan to credit-worthy commercial borrowers.

The banks' long-term Treasury-bond buying spree was subsidized by a reduction in commercial lending of $27.8 billion - a cutback of a full 4 percent in commercial loan volume.

The yield on long-term Treasury bonds must be lowered to encourage banks to make loans instead of buying bonds.

In order to accomplish this, Treasury Secretary Nicholas Brady must stop selling long-term bonds and Federal Reserve Chairman Alan Greenspan must abandon his myopic concerns about inflation and begin acting aggressively to have the Fed purchase Treasury bonds.

It's about time that Brady and Greenspan stop focusing on fattening up bank balance sheets and start looking at ways to feed the economy.

The Federal Reserve and Treasury have managed to substantially reduce the cost of money, yet they have yet to encourage banks to lend.

Despite a discount rate (what the Fed charges on its loans to banks) of 3.5 percent - the lowest rate in some 18 years - commercial loans have actually decreased by 4 percent.

The Federal Reserve and Treasury have only succeeded in turning banks into government bond funds.

Until credit becomes available to the American people, the recession will continue and the hoped-for turnaround in the economy will not take place.

With banks paying interest on deposits at an extremely low 4 percent, why should banks make loans - even to creditworthy borrowers - when they can get a return of up to almost 8 percent simply by purchasing Treasury bonds?

Treasury bonds are paying record yields - an average of 7.91 percent for 10- to 30-year bonds. Under current requirements, banks may invest in Treasury securities without setting aside additional capital.

However, if a bank wants to lend money, it is required to support the loan by setting aside a large amount of capital.

Lending money involves the further risk that an overzealous bank examiner will decide that the borrower is too much of a credit risk and either require the bank to, among possible actions, call in the loan or set aside further reserves to back it.

If Brady stops selling long-term bonds, and if the economic principles of supply and demand still work, the cost of bonds will increase and the interest rate yield on them will decrease.

Not only will these tactics discourage banks from investing in government securities, they will reduce annual federal borrowing costs by billions of dollars.

I am amazed, concerned and even angry to find that the Fed and the Treasury have not yet pursued this avenue of economic stimulation.

In fact, it is lack of decisive action from the Federal Reserve that led me to vote against Alan Greenspan's confirmation.

So far, the Fed and Treasury policies have not been successful in spurring the economy, despite the lowering of interest rates.

It's about time that Brady and Greenspan got the message. Act now to stimulate the economy - get the banks to make credit available to creditworthy individuals and small businesses.

(Alfonso D'Amato is the junior U.S. senator from New York and the ranking Republican on the Senate Banking Committee.)