Brief Thoughts on Reconciling Heterodox and Mainstream Macroeconomic Ideas

In my gut, I feel there must be a way to reconcile the mainstream New Keynesian model with the mechanistically accurate way many heterodox economists (mostly thinking of Post-Keynesians here) describe the functioning of the monetary system. There will likely be some irreconcilable gaps, particularly when we start to move away from the monetary system, but it may be possible in a rough sense. I feel this way because most of the time, the two sides can’t even agree on their disagreements (okay, at least the participants on the internet). To me, that’s a sign there’s a serious element of cross-talk whereby each side is speaking a different language.

Why Calling Banks "Financial Intermediaries Between Lenders and Borrowers" Is Okay, Even if You View Banks Through the "Endogenous Money" Lens or Something Similar


There have been extensive debates on the econoblogosphere over the past couple of years regarding the degree to which banks are “special” due to the manner in which they create money and credit. Steve Randy Waldman, as is often the case, provides a helpful synthesis, discussion, and collection of links regarding these debates.

As almost always in these sorts of mainstream versus heterodox intellectual scuffles, the extent to which there is disagreement due to differences in framing and semantics, as opposed to the underlying fundamental issues, is unclear. Additionally, there are many elements to this debate, and both sides have valid things to say (disclaimer: I am admittedly amalgamating the debaters into two broad camps for simplicity, but further delineations can be made). However, I do not think that for each and every element of the debate, each side offers an equally valid viewpoint. In any case, my intention here is not to provide a comprehensive analysis of these matters. I recommend reading JKH’s commentary at the following links for more detailed thoughts along these lines.

What I’d like to focus on is the mainstream economist’s tendency to characterize banks as ‘financial intermediaries between borrowers and lenders’ with respect to their lending function. Many participants (but not all!) in this debate that lean towards the economic heterodoxy have a problem with this characterization, given their usually more nuanced understanding of banking operations and mechanics. I understand and sympathize with this perspective, but I ultimately aim to argue what’s stated in the title of this blog post. I think someone with an endogenous view of money can be okay with the mainstream characterization, even if some mainstream economists who use it don’t have a very robust understanding of how banking works operationally.* To be clear up front, none of this is to say that banks are not important to the economy or should not be modeled.