Do you know Quantitative Easing?

In QE the Federal Reserve buys assets from the large banks. Things like treasury bills and mortgage backed securities.

This is something the Fed should be prohibited from doing. Ever. The conflict of interests is massive.

But the Fed doesn't buy these with money that they have on hand. They just credit the cost to the banks. The Fed has given up nothing. New dollars have just been created.

That causes inflation, but we've covered that.

The banks now have a lot of money. And no one is borrowing, which is what they would normally do with it, in order to earn interest and make their shareholders happy.

Businesses are failing to borrow because of their perception of the regulatory environment. In addition to the normal hefty regulatory burden we have significant changes to it that are pending, delayed, pushed to the right. In that environment, business is unable to plan for how those changes will affect them, or when, or even if. And it doesn't matter if none of that were actually true--that's how it is perceived, so that's how they are behaving.

So the large players aren't taking out loans in any great quantity. Not spending any money that they don't have to. This is the liquidity crunch that started in 2007. Despite that the illiquid assets have been bought up by bailout and replaced with cash, it's still, psychologically, in crunch mode and has not been fixed.

The banks, at current interest rates won't make much on loans anyway. So they put the money in the stock market. The very act of their making large purchases drives the share prices up. And everybody is happy.

Or will be until the new money dries up. Stocks are being driven by surplus money (this is true trickle down economics on a massive scale, especially when someone wants to say that this is benefiting people with 401Ks) and not by productive work which is how a healthy market is driven.

A true fix would be to first address the reasons businesses aren't spending. and then to make lending more profitable. But that would involve deflation, deregulation, and raising interest rates, and mostly, a lot of pain. So we follow the alternative which is the equivalent mechanically of driving the car even though there is no oil in the crankcase any longer, just because we can't be bothered to walk.