On Mar 24, 2013, at 12:25 PM, Doug Henwood wrote:
>
> 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.
The banking system includes the central bank. In the real world the "not almighty" Fed is a creature of the banks and so is the Treasury, and their "policy stance" is the policy stance of the banks, nobody else. It does set the rate at which it provides funds. By borrowing at that rate any (not spectacularly insolvent or, if so, TBTF) bank can fund all the deposits it finds profitable to create.
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