The full title of this book by Mervyn King is
“The End of Alchemy: Money, Banking and the Future of the Global Economy“.
I my review posted on Amazon.co.uk, I gave the book a rating of Four Stars. This means I consider it to be good.
Here is my book review.
Thought-provoking, revealing but also very concerning
As Governor of the Bank Of England, the author Mervyn King was an insider to the build up to the 2007/8 financial crisis and to the emergency steps taken to stop the financial systems collapsing.
This is not a “how I saved the world” type of book. King says that it’s the job of historians with access to all the papers when they are released to make the proper judgements. Instead this is a deep reflection on how the problems built up during a period known as the Great Moderation and how they might be solved in the future.
In some ways there are two books here. One that looks at central banking and the dangers inherent in the lender of last resort role of central banks and the other looks at the wider economic system.
Modern economic theory largely overlooks the role of the banking industry and how it creates money through lending. This left the authorities to be complacent about the growth in debts which effectively brought spending forward from the future and which disguised the disequilibriums in the international trade with some countries like Britain and the United States with permanent balance of payment deficits whilst others ran permanent surpluses. The wonderful mixture of low inflation and high employment and growth was too good to risk by trying to solve the underlying issues.
King wants to change the role of the central banks away from lender of the last resort to “pawnbroker for all seasons.”
I can’t see the name catching on but the underlying philosophy seems sound to make sure that banks have the emergency finance available when needed. In this scheme, banks would have more equity and short term assets to meet sudden runs on banks and to decrease the risk of bad events causing financial ruin. They’d also recognise assets in advance that they were prepared to pledge for emergency help and have their quality pre-judged by central banks. This would require a big change in the way banks work but the idea is simple and feels to me much better than hugely complicated regulations that probably focus too much on stopping the last crash happening again.
King identifies that we have a fallacy of policy where things that help in the short term are creating further instability in the system over the longer term. This includes both quantitative easing and zero (or negative) interest rates. As far as he’s concerned, future growth is going to require improvements to productivity so the right corrective actions take away constraints that stop productivity improving.
I agreed with much but not all of the book but I was left feeling depressed.
The world is in a mess and it’s getting worse not better. There hasn’t been political will to face up to the problems caused by economies having unrealistic expectations in the 1990s and early to mid 2000s. People have been too willing to paper over the cracks. There’s an unwillingness to recognise the value of a recession in killing off weak businesses that shouldn’t exist, punishing bad investment ideas and releasing resources for better use.
Just like deliberate, controlled forest fires create firebreaks and prevent massive fires that run out of control, controlled recessions where the unfortunate are protected by the state, reduce the likelihood of much bigger crises. We need to have periodic resets and while the authorities try to stop us facing up to reality, I worry about the really big crash that happens when they lose control. I don’t want Britain to go through a 20+ year slump like Japan has endured.
It is available to buy from Amazon.co.uk and Amazon.com.
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