Credit is far from fixed. Why are banks are booming again?

The economy isn't getting better. There, I said it. I know that's not what the government wants us to be saying, let alone thinking. Instead, we're supposed to be thinking and saying that the turn happened... and that the economy and markets are now all go for growth.

But the turn hasn't happened... and the economy and markets aren't go for sustainable growth. There's a simple reason why: The key to getting the economy better is to get credit flowing again. And that's not happening.

Let's look at the three core areas of credit: consumer, business and corporate.

The Federal Reserve Bank (Fed) tracks and publishes aggregate credit numbers for each of these three core areas of the economy. It's of course on a look-back basis of the prior quarter - but it's a good indicator of whether the available credit in the economy is generally expanding or contracting.

On the consumer side, including all key areas of consumer credit, the US markets have been reducing the amount of credit, contracting by a current rate of 3.5 percent. That's worse that the recession of 2001, which actually still managed to generate an increase in consumer credit.

You have to go back to 1991 to see the last major drop in consumer credit, and even then the contraction was brief and much more shallow: a decline of only 1.2 percent. To find a larger contraction, you have to go back to the days of the Carter Administration in 1979, when consumers were cut off from credit - a contraction of more than 7.0 percent.

Given that the economy is driven by the individual and household consumption of goods and services that make up more than two-thirds of our Gross Domestic Product (GDP), this drop in consumer credit is having far-reaching impacts.  One result is that small to mid-sized businesses - a group that provides much of the direct products and services to consumers and therefore has traditionally been a bit more insulated - are now feeling the credit pinch.

Credit extended to businesses in the US contracted in the most recently reported data from the Fed by 0.3 percent. Not a big contraction - but a contraction nonetheless. That's important: This sector of lending didn't contract during any of the recessions of the past two decades.

You have to go back to the major credit crunch following the thrift crisis to see the last business credit contraction. Even during the Carter recession, business credit increased. A drop of any amount isn't good by any measurement.

Corporate credit is the one sector of the credit market that's still expanding. Yes, credit to corporations in the US is still growing at a healthy rate of 2.0 percent.

This isn't too surprising, because the public and private bond markets - as well as direct lending from the Fed and special programs from the US Treasury - have been fueling a credit frenzy.

And the prime beneficiaries are Banks.

Not Just US

This schism between credit going to financials and big corporations, while consumers and frontline businesses go wanting, isn't just happening in the US.

If you look at similar statistics elsewhere, particularly in the European Union (EU), you'll see even worse credit conditions - especially for business credit. In a survey just released in Germany - the core economy of the EU - German banks were deemed to have literally cut off businesses from credit, and in a very abrupt fashion.

The survey studied credit lines to more than 1,600 businesses, and found that more than 57 percent were cut off or severely restricted from getting credit from banks and financials.

The ongoing survey shows this cut off of business credit has surged by a factor of more than 10 in the most recent month's data.

Meanwhile, supply for corporate credit is expanding. In particular, bond issuance, as well as existing public and privately placed bonds of larger corporations - including many financials - has continued to see heavier demand and falling yields, resulting in rising bond prices.

Banks are Uncle Sam's Fortunate Sons

Banks are now showing that they're right in the sweet spot of the markets. They're continuing to get US credit backing in programs such as the Temporary Liquidity Guarantee Program (TLGP), in which bonds issued have US credit guarantees as well as repurchase agreement financing from the Fed against nearly any kind of collateral - even non-performing!

And with yields on the short-end either at or barely above zero, banks need do little more than just post their bad loans and securities and get nearly free financing. They can (and do) even borrow further in the public market with US government guarantees and turn around and buy credit-guaranteed bonds from other financials at higher rates.

So if you're a bank, why mess with lending to businesses or consumers when you can just take government money nearly risk free?

This is why we're seeing old-line bank holding companies - as well as opportunistic investment banks that have converted into bank holding companies - turning in huge surges in quarterly numbers.

As long as the government continues its series of sweetheart deals, banks will be humming along. But meanwhile - on this side of the Atlantic and on the European side - as long as so little effort is put into cleaning up balance sheets and lending to the front line of the economy, consumers and small to medium-sized businesses will continue to struggle.

Investors should continue to buy and own my favored series of bank preferreds and bank bonds to cash in on the credit market schism, while being even more cautious of the general stock market. And for now, continue to ignore any talk that the economy is fixed and growing again.