On Mar 24, 2013, at 12:09 PM, Shane Mage <shmage at pipeline.com> wrote:
> On Mar 24, 2013, at 11:15 AM, Doug Henwood wrote:
>> On Mar 23, 2013, at 11:58 AM, Lew <wsm_mod at yahoo.co.uk> wrote:
>>> Shane Mage wrote:
>>>>> Doug Henwood wrote:
>>>>> Banks know they need deposits, otherwise they have nothing to lend...
>>>> Except that the deposit is *created* by the loan.
>>> If this were true then no bank would ever go bust or get into difficulty - they would simply create the necessary deposits by making loans.
>> No kidding. Banks make loans and create deposits but then they have to fund them (which is the way the sequence often works in the real world). If they can't fund the loan, they're fucked.
>
> And what are central banks for? chopping liver?
They can accommodate the demand or not, depending on their policy stance. Quoting myself from Wall Street:
> Of course, Minskian innovations can’t evade the tightening hand of the central bank forever. Perhaps the most sensible view of the whole matter was the best expressed by a central banker, Alan Holmes (1969, p. 73), then a senior VP at the New York Fed, speaking at a time when the monetarist challenge was marginal but on the rise: “In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accommodating that demand; over time, its influence can obviously be felt.” This is a refreshing antidote both the the mechanistic nostrums of the monetarists and the vision of limitless elasticity of the extreme endogeneists like Moore. The Fed, like all central banks, is mighty, but it is not almighty.