A Bank is not a Financial Intermediary
Some additional context: Cullen has been trying to convince Paul Krugman to embrace MMT or PK or whatever you want to call it, unfortunately with limited success to date. He's certainly picked the right target, if Krugman publicly converts then it's a real game changer, but I don't think it's going to happen (why I think this is another story for another time).
Krugman dismissed Cullen by citing Diamond-Dybvig and Tobin-Brainard, the former I'm very familiar with but the latter is new to me. I won't get into the meat of Krugman's dismissal because it's of the form: either this doesn't fit into the model or it's a trivial case the model already covers, it does not grapple with the question at hand because he does not need to. But the papers themselves are interesting for revealing the underlying assumptions.
I'll focus on Tobin because that was the one that was new to me, and zanon, in comments, highlighted a point that I thought was very interesting. Tobin repeatedly refers to banks as "financial intermediaries." What is a "financial intermediary"? Tobin explains:
“…the essential function of financial intermediaries, including commercial banks, is to satisfy simultaneously the portfolio preferences of two types of individuals or firms. On one side are borrowers, who wish to expand their holdings of real assets… On the other side are lenders who wish to hold part or all of their net worth in assets of stable money value with negligible risk of default.”So while Tobin understands that banks make loans which then create a deposit, he sees this function as a market making or coordination activity, something which brings efficiency and eases friction between the actual lender and borrower. It's a middleman role which, if we assume is acting appropriately, one can safely abstract out of models to focus on the primary agents in the exchange, the lender and the borrower. Also, a Ramanan correctly notes, when we look at the composition of national accounts, financial firms similarly play an intermediate role where they sit between initial production at the top, and ultimate consumption at (for example) the household level at the bottom.
“…intermediation permits borrowers who wish to expand their investments in real assets to be accommodated at lower rates and easier terms than if they had to borrow directly from the lenders.”
But it is precisely this characterization of a bank's role that I think is the problem with modern macro. By seeing them as an essentially coordinating function they are not modeled as agents in and of themselves, and therefore the models are wrong because banks are ultimately active lending agents not lending mediators.
Straight from Google:
A person who acts as a link between people in order to try to bring about an agreement or reconciliation; a mediator."intermediaries between lenders and borrowers"
1: one that acts or exerts power2a : something that produces or is capable of producing an effect : an active or efficient cause
"On one side are borrowers, who wish to expland their holdings of real assets… On the other side are lenders who wish to hold part or all of their net worth in assets of stable money value with negligible risk of default.