This book has emerged from the smoking detritus of the Credit Crunch and does an excellent job of clearing the air for specialist or non-specialist alike. But be warned. The authors calmly plant three sticks of dynamite. While their targets are to render obsolete certain entrenched orthodox myths, there's the risk that these explosives may go off in your head, triggering different states of epiphany, anger or disbelief.
`Money and banking,' they explain, 'as subjects for serious examination in their own right, have been largely neglected by orthodox economics over the past 60-70 years.' If you were wondering what might account for this strange omission this book will not tell you. However, the late JK Galbraith is wheeled out to offer a suggestion: bankers' pride in their access to superior knowledge. And to protect that knowledge what better gatekeeper than wilful obfuscation? Why is it that the Bank of England's M0, for example, is known by four further financial monikers (Narrow Money, Central Bank Money, High-Powered Money and the Monetary Base)? If the intention was to throw us off the scent at First Base then no wonder we are bamboozled by opaque terms like Quantitative Easing, and all those acronyms for derivatives. So is our cluelessness about the nature of money a relatively new thing? It would appear not. The book reveals that banking crises feature very frequently in our history. But somehow the solutions offered by those on the inside have been patchwork. Perhaps we were just beter engineers than financial engineers. One also wonders, in the case of the English, were the literary-philosopher class so proudly disdainful of money that they never bothered to pay attention to where it came from?
Whatever the reality, the authors show how four factors: Nixon taking the US off the Gold Standard in 1976, the resultant explosion of capital flows, the ideological embrace of financial liberalisation (under Reagan, Thatcher and the Neo-Classicists) and exponential technological change in financial services have propelled us to the current impasse.
What of our regulators then? The Bank of International Settlements, who are supposed to be the Chief Police of the system, are the recipients of the first stick of dynamite. It is respectfully suggested that the entire thrust of their Capital Adequacy rules is misplaced and has instead triggered in the banks regular outbreaks of pro-cyclical behaviour, even spawning the entire Shadow Banking system. The next stick is reserved for orthodox economists: credit, we are told, does not clear naturally in response to a matching of supply and demand; on the contrary credit expands in response to the availability of its supply! While the price of credit may have some influence on the demand for it, this has been seriously overstated (a polite critique of Bank of England policy). All this and much more, including the behaviour of the financial sector pre- and post-Crunch, makes sense once the authors detonate their third stick: 97% of the money in our economy today has been created by private sector banks. As this remarkable statistic sinks in one begins to see why we have such a stark asymmetry of risk and rewards, responsibility and accountability between private sector on the one hand and public sector, taxpayer and regulator on the other hand. The fact that banks enjoy first-user advantage over this new money by attaching debt to it is a story for another book.
Suffice to say this is an admirably well-written book, combining lucid exposition of a tricky subject with smatterings of insight from notable figures. The workings of the Bank of England are well covered, as is the history of coinage from Elizabethan times and the role of war in the evolution of financial services. It has a foreword from former MPC Member Prof Charles Goodhart. Karl Marx also makes a brief but useful appearance, (which may `do for' any US sales). There is no dogma here, but nor is there any mention of ethics or an alternative vision. Its value lies in its potentially transformative impact on financial education in the UK, encouraging us finally to come to terms with our own ignorance on this vital subject. Only then do we have a chance of forging a viable - even sustainable - financial system.
