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Banks Giving Away Money

Something strange is afoot in the banking industry. They're giving away money. This isn't normal, but I think I see what's happening. They're giving away money because they're running out of cash.

"What's that? They're giving away what they need?" Yes. Recently, two banks have sent me letters bribing me to entrust them with my money.

My bank wants me to make a deposit into my savings account. They said they'll give me $30 if I deposit at least $4000, or $15 if I deposit at least $2000. But I have to leave the deposit there for at least six months.

Earlier, I got a letter from a different bank (who I have no association with) offering me $75 if I'll open a checking account with them and keep it for at least 8 weeks.

What's going on? Why do they need deposits so badly that they'll pay for them?

I think there are basically three things combining to put pressure on the banks. (1) The federal funds rate has been rising steadily since mid-2004, making it more expensive for banks to get money from the Fed. (2) The banks are hurling money into the housing bubble, which continues to grow. (3) Finally, banks' required reserves have been increasing, limiting their ability to make loans. (The increasing reserves are partly a reflection of the loans already made.)

Look at the squeeze. The mortgage market is soaking up loans while the Fed is increasing its rates and reserve requirements are going up. To keep loaning into the housing market, they need cash. Since the Fed took its ball and went home, the cheapest source of cash is depositors like you and me. If we open accounts and make deposits, they'll have more cash to loan out. The mortgage business is profitable enough that they'll pay us to part with our money.

As long as they're giving me money, I'll play along. But I think this is a bad omen for the banks.

Tiny Island