On Mar 22, 2013, at 2:36 PM, Doug Henwood wrote:
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> Banks know they need deposits, otherwise they have nothing to lend...
Except that the deposit is *created* by the loan. Business deposits (transaction balances) always stem from business loans (aggregate business-sector liabilities to banks can be expected always to exceed business cash balances). Consumer deposits (which can cost as little as the "implied" interest represented by the cost of their maintenance) are needed only to satisfy the reserve balances required by the central bank as a percentage of their outstanding deposits. But the banks, properly capitalized, with acceptable collateral (ie., their loan portfolios) can always borrow enough extra cash from the central bank to meet that requirement. Thus the ability of the bank to lend, and consequently its deposit base, *never* depends on money deposited by the public--it is constrained only by the willingness of the central bank to lend at a sufficiently low rate (currently about zero). Money does not create itself. The banking system creates the money that it then lends. Its desire to lend, though, depends on its ability to charge enough interest to compensate for the risk of default: which is why the willingness of the central bank in a depression like our current one to lend unlimited amounts at zero interest can and does go together with very tight credit as experienced by ordinary businesses.
Shane Mage
"All things are an equal exchange for fire and fire for all things, as goods are for gold and gold for goods."
Herakleitos of Ephesos, fr, 90