During Recession, banks loans decrease which leads to financial constraints and ultimately Investment suffers and declines.
my question is - "Are loans lower because of demand or supply?"
My thoughts are - We know that money can/is generated by banks at will so it doesn't seem like it is money supply problem but then my reading from newspapers tells me that it is the banks which stops lending perhaps due to realization that business firms will have a hard time so probability of low profits and therefore stops credit and as a result investment suffers. or Is it the other way round that Investment stops in recession due to meagre growth which result in low profitability and firms default on their loans leading to build of Non performing assets (NPA) and then banks responds to that?
If it is the former then why banks don't lend when it could help offset the slowdown/recession as Investments could potentially offset it and If it is the latter then does it not aggravate the problem because until investments picks up again, you can't have growth which means no profits and further adds to NPA problem?