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Having excess cash at the bank only makes sense for interest rates to be low.  As I’ve mentioned time and again, a business doesn’t put an item on sale if it doesn’t have the item to sell.  Banks have money, they’re just sitting on it.

“Total Reserves in the banking system have increased by $857.8 billion over the twelve month period ending in May 2009. Excess reserves in the banking system have increased by $842.1 billion in the same time period.  The Federal Reserve System has overseen a 1,900% increase in total reserve in the banking system, year-over-year, for the year ending May 2009, and banks have chosen to sit on the injection almost dollar-for-dollar!…banks are holding such large amounts of excess reserves.”  Jason Mason

One reason for hoarding cash is that banks could be sitting on the reserves waiting for the next go around of financial problems, such as the option mortgage defaults that may arise.  But is the option mortgage to blame?  No, it’s a people problem, but the mortgage is the scapegoat.  Borrowers and sellers not knowing what is going on has created the mess.  (These are not new loans.)

Another reason reserves may be so high is that borrowers don’t borrow and investors aren’t buying the loans.  Why would you invest when many politicians have been shutting down business since 2006 and wanting to take the incentive out.  (Okay you won’t hear them say it that way, but their actions prove it.  Take a look at California, or see what Nancy Pelosi has to say about windfall profits and Wallstreet.)

So why the increase in reserves?

1.  Times are tough.  People don’t borrow.

2.  Times are uncertain.  People put money in a savings account.

3.  Getting out of debt means sending more money to the banks.

4.  Doubling credit card payment (which George W. signed a bill) sends more money to the banks.

Cash flow increases to the bank.  Maybe we should all think the bank.