Re: Hummel Inquiry

[wfhummel@xxxxxxxxxxxxxx (William F. Hummel)]

>Warren Mosler wrote:
>
>>Loans create deposits.  The banking system can always create new loans.
>>They don't need or have any use for 'deposits to make loans with.'
>>This is more explicit at the larger banks.  They make loans first and
>>then fund them.

Henwood:
>But only because there's enough money sloshing around the system. If the
>central bank decides not to validate the additional credit creation, things
>get crunchy, and loan expansion ceases (sooner or later, allowing for all
>the Minskian innovations).
-------------
The Fed could only put the break on lending that way if it were
prepared to see the Fed funds rate skyrocket.  In the short run
it has little leverage to limit bank lending, except in extremis
when it might set explicit lending rules on banks.  Under normal
conditions, the Fed can only control bank lending by influencing
demand for credit through its setting of the price of money.
Assuming you are not referring to bank capital, I don't think
money has to already be sloshing around the system.  Lendable
reserves can easily be created by the Fed when needed.

William