by Mervyn King
Plenty of the major players from the 2008 financial crisis, including then-Federal Reserve boss Ben Bernanke, and former US Treasury Secretaries Tim Geithner and Hank Paulson, have written books on what happened during those tumultuous months.
However, these have largely been conventional memoirs designed to justify their actions. Mervyn King, who governed the Bank of England from 2003 to 2013, takes a completely different approach. The End of Alchemy: Money, Banking and the Future of the Global Economy spends next to no time on the day-to-day events. Instead, King examines how our financial system evolved, how it caused the crisis, and what needs to be done to reform it.
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This is an ambitious project. King takes us on a tour through economic and financial history and builds a case for getting radical and rebuilding banking from scratch. He argues that our current system of fractional reserve lending, whereby banks hold a small proportion of our deposits in liquid assets and lend out the rest, is inherently unstable. It also effectively gives banks control over the creation of money (and hence over the direction of the economy).
Under King's proposal, banks would still be allowed to engage in a limited amount of risky lending. However, over the long run they would gradually have to close the gap between their "risk-weighted" assets and their liabilities until they were equal. Instead of unconditionally bailing out troubled institutions, central banks would be willing to lend against a wide range of collateral, but at sharp discounts that grew bigger the riskier and less liquid the asset.
These reforms would in effect make a bank run impossible if assets were perfectly matched by liabilities, then any given bank would always be able to return a client's money if necessary, with the central bank operating more like a pawnbroker in times of duress than as the traditional lender of last resort.
The End of Alchemy certainly provides plenty of food for thought. One criticism is that King tends to meander from topic to topic. This lends a conversational tone, but it makes it tricky for the reader to keep track of what he is saying. And while King deserves praise for taking the time to explain some key technical terms in the first few pages, his use of economic jargon may also be a bit off-putting for those who have not studied economics.
Overall, this is a "fearlessly honest explanation of the 2007/2008 financial collapse", says Liam Halligan in The Daily Telegraph, even if "the narrative sometimes gets bogged-down in descriptions of academic debates". King's book is "an outstandingly lucid account of postwar economic policy-making and the dilemmas we now face," says John Plender in the Financial Times. "It is rare to encounter a book on economics quite as intellectually exhilarating... a dazzling performance indeed."
The End of Alchemy: Money, Banking and the Future of the Global Economy, by Mervyn King. Little, Brown (£25).
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