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The End of Alchemy: Money, Banking and the Future of the Global Economy Hardcover – 2016
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The past twenty years saw unprecedented growth and stability followed by the worst financial crisis the industrialised world has ever witnessed. In the space of little more than a year what had been seen as the age of wisdom was viewed as the age of foolishness. Almost overnight, belief turned into incredulity. Most accounts of the recent crisis focus on the symptoms and not the underlying causes of what went wrong. But those events, vivid though they remain in our memories, comprised only the latest in a long series of financial crises since our present system of commerce became the cornerstone of modern capitalism. Alchemy explains why, ultimately, this was and remains a crisis not of banking - even if we need to reform the banking system - nor of policy-making - even if mistakes were made - but of ideas. In this refreshing and vitally important book, former governor of the Bank of England Mervyn King - an actor in this drama - proposes revolutionary new concepts to answer the central question: are money and banking a form of Alchemy or are they the Achilles heel of a modern capitalist economy?
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King suggests that Central Banks, rather than being Lender of Last Resort, should instead be Pawn Broker for All Seasons, and in the last chapter, Lord King outlines the need for essentially a new Bretton Woods, as the current direction is unsustainable in King's eyes, and indeed, the eyes of many.
The book itself is surprisingly readable, and is not as tiring or engrossing as this reader had previously imagined.
If one has already read many books since the Crash of 2008, and wonders if they should read this one, the answer is simply, YES!
It seems to have had a surprisingly low-key reception, considering the author and the prescience of the subject matter, but that in no way detracts from the humility, importance and humour with which it addresses economic issues. I think any economics student who happens to get their hands on this would get a great springboard with which to build on in the direction that economics and banking are heading.
Thank you Mervyn King.
Why is this a great book?
* eloquent and well written
* readable by a non economist
* lucid explanations
* interesting and sometimes scary historical perspectives and parallels
* plenty of examples
* enough repetition that they key ideas stick
* concrete ideas for the way forward
* courageous in its challenge to all of us
I will have second read to see how much more I can get to stick.
Logically coherent while reading has enough new stuff that it was not easy for me to internalise... but that is my issue rather than the books!
My off the top of my head insights in no particular order are
* The financial and banking system has relied on alchemy
* governments can print more paper money than they have gold or underlying assets
* banks take low risk deposits (cash and short term debt) and use this to fund long term risky projects. Because they pay little to depositors and expect high returns for the long term investments they make money
* Crises of liquidity can develop due to a lack of confidence in the ability of a bank to pay depositors.
* Crises of solvency occur when the assets underpinning the bank are insufficient to cover their debts
* As banks sought to compete with one another and chase superior returns and performance they ended up participating in ever riskier debts and as interest rates fell to all time lows they ended up highly leveraged, often with just a few % points of equity or less vs banks which might have had 20 to 40% equity in the past.
* Governments had sought to stabilise inflation by controlling interest rates
* There was a failure to recognise a growing disequilibrium in the world between those countries which were spending from the future today using cheap debt and building up trade deficits, and those (China and Germany) which were saving rather than spending, exporting to the others and building up huge surpluses which were used to service the debt of the others.
* Monetary Union in Europe has not been a success. Ultimately it requires political integration to succeed. Germany has a currency which is undervalued and a huge trade surplus. Many others have currencies which are stronger than they deserve to be and are carrying huge debts.
* The situation of Greece today, where it can never repay its debts within the EU by borrowing more and more within the EU (circular argument) or from outside the EU (just increases the debt burden) is a “pretend and extend” policy.
* Radical Uncertainty, Disequilibrium, Prisoners Dilemma, Trust
* Failure of classical economics which consider the economics of “stuff” rather than the economics of “stuff happens”
* Current low demand a response to the changed heuristic concerning the perceived life time income and inability to spend - will not be put right without a rebalancing of the current state of disequilibrium in the global economy
* Net exporters need to focus on demand led growth and give up their surpluses. Net importers need to learn how to export again. If we do not find a peaceful way to rebalance things it will get nasty. The Prisoners Dilemma means we need to trust each other enough to act in a reasonably coordinated way to escape to the right place.
Clear and well written, with a minimum of technical language, it is most interesting that, unusually for a specialist in his field and unlike many of his colleagues who have gone into print regarding the same issues, Baron King identifies the root causes of the crisis instead of focussing on the all too evident consequences. Therein lies at least the the possibility of a beneficial solution, though, with many of the same, or similar experts involved, that may be asking too much.