A riddle: when do banks and consumers act the same? When they get money from the government. They’ve both received tons of cash from the federal government in the last several months and aren’t using it.

The Troubled Asset Relief Program, (TARP) for example, was enacted last fall employing different tactics designed to encourage banks to resume lending. Initially the plan was to have the government purchase the bad loans clogging bank balance sheets. That plan was scrapped in favor of investing in the banks themselves.

And, the result? Since October, when TARP was approved, commercial bank lending has actually declined $169.6 billion, most of which was a drop of $86.0 in commercial and industrial loans, the money businesses use for payrolls, inventories and investments. It’s unclear from the weekly Federal Reserve report which tracks commercial bank assets whether the drop in loans outstanding is the result of tighter lending standards or of borrowers paying down debt, but the bottom line is clear: even if borrowers paid off loans, banks didn’t replace them with new lending.

Instead, bank cash is up dramatically: more than double from the $73.9 billion when TARP was enacted.

So, banks didn’t put the money into circulation so to speak, instead sitting on it, waiting for the next shoe to drop which, according to one Washington insider economist, will be commercial real estate loans.

“The commercial and industrial loan declines,” he said, “likely reflect the growing concern about commercial real estate (“CRE”) lending.  Default rates on CRE loans have been rising precipitously and the CRE mortgage backed securities market essentially ceased last year. Since small- and mid-sized banks have large exposures, around 47% of total loans, I am sure that regulators are telling them to tread carefully.”

So what’s the parallel with consumers?

As Friday’s personal income and spending report detailed, personal income jumped 1.4% in May while spending increased just 0.3%. In dollar terms the difference is still starker. Personal income rose $167.1 billion while spending rose just $25 billion. And, of the $167.1 billion increase in income, almost all of it was due to government transfer payments including a one shot $250 bonus payment to Social Security recipients and those receiving veterans’ benefits. The Bureau of Economic Analysis said those payments accounted for $157.6 billion of the increase in transfer payments. (Another $120 billion was in the form of unemployment insurance benefits.)

It’s not the first time government transfers of one sort or another have made up for anemic wage growth. Since October – the starting date for TARP for comparison purposes – personal income has increased a net $69.3 billion. Government transfers in the same period were up $330.7 billion which means other sources income were down $261.4 billion – including wages which were down $130.9 billion.

Just as the banks have not used the cash they received as intended, consumers too have been hoarding, adding about $622 billion to savings by cutting spending.

That lack of spending keeps merchandise on shelves with little need to replenish stock. It also stymies home buying which in turn reduces home building affecting suppliers and the workers they might employ.

There may be an unintended positive consequence however.

One of the concerns of the huge run-up in the money supply through various Federal Reserve and Treasury actions – including flooding markets with cash -- has been the fear of inflation. Inflation generally follows when more dollars chase a finite amount of goods, driving up the prices of those goods. In the current scenario though, while we do have more dollars, they haven’t found their way into the economy. Instead, there’s been a circular flow of the funds used to bail out banks. While the Fed has provided cash to banks through direct and indirect lending, those funds seem to rather quickly end right back up at the Fed in the form of excess reserves of banks, not being spent. 

For the economy to start a real recovery though, someone has to blink.

Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.