The End of Alchemy: Money, Banking, and the Future of the Global Economy by Mervyn King

Mar 15, 2016 Athan Tolis rated it it was amazing

Shelves: ec-and-finance, politics, favorites

Stop what you’re doing, drop everything, buy and read this book. Twice. I’ll start my second reading as soon as I’m done writing down my thoughts.

I’d gladly swap all ten books I’ve read about the crisis (“mine” at ten) for this modest and mischievous masterpiece.

Mervyn King does not go looking for villains or victims here. You will not find the words “greed” or “fear” in this text, nor do you get any history recounted, unless it is to illustrate a point. What you get is a ...more

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May 01, 2016 Domhnall rated it it was amazing · review of another edition

Shelves: economics

‘For centuries alchemy has been the basis of our system of money and banking. Governments pretended that paper money could be turned into gold even when there was more of the former than the latter. Banks pretended that short term riskless deposits could be used to finance long term risky investments. In both, cases the alchemy is the apparent transformation of risk into safety. … For a society to base its financial system on alchemy is a poor advertisement for its rationality. The key to ending ‘For centuries alchemy has been the basis of our system of money and banking. Governments pretended that paper money could be turned into gold even when there was more of the former than the latter. Banks pretended that short term riskless deposits could be used to finance long term risky investments. In both, cases the alchemy is the apparent transformation of risk into safety. … For a society to base its financial system on alchemy is a poor advertisement for its rationality. The key to ending the alchemy is to ensure that the risks involved in money and banking are correctly identified and borne by those who enjoy the benefits from our financial system.’ [pp250,251]

‘Four concepts have run through this book in order to explain the nature of financial alchemy and the reasons for the present disequilibrium of the world economy: disequilibrium, radical uncertainty, the prisoner’s dilemma and trust. It is hard to think about money and banking and their role in the economy, except in these terms.’ [p367]

Mervyn King seems to enjoy quoting Horace Walpole saying ‘the world is a comedy to those who think, a tragedy to those who feel.’ [p369] Once we appreciate that King belongs to the former category, we can appreciate his thoughtful book for the valuable insights it does contain and tolerate – though with difficulty in my case - the lack of feeling which makes him so relaxed about the unfolding tragedy it describes so clinically.

He was Governor of the Bank of England in the dreadful years of the financial crisis and as such can offer a privileged insight into matters of banking and economic management at the very highest level but there is a danger in feeling excessive deference. When the book slows down to provide readers with a basic introduction to the theory of money, banking and global economics, the fear is not that we are being patronised (it is always helpful to go over the fundamentals) but that we are being nudged towards a particular way of thinking. While one can hardly challenge King on his areas of expertise, one does have to be aware of the topics he does not focus on and does not expose to scrutiny. He is not only explaining the financial crisis but also framing it, inviting us to see it as a technocratic challenge for which the solutions lie in the expertise of our central bankers, beyond the grasp of ordinary mortals. His is a world of economic mistakes, not economic crimes. It is a world millions of light years apart from (say) Ship of Fools: How Stupidity and Corruption Sank the Celtic Tiger by Fintan O'Toole or perhaps Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens by Nicholas Shaxson.

We have to respect King’s position among the key decision makers of the global economy and he gives the sense that, from practical experience, he is impatient with classical economists and so, it seems, are his colleagues. He writes for example: ‘Bob Bernanke, then Chairman of the Federal Reserve, said in January 2014, that ‘the problem with QE is that it works in practice, but it doesn’t work in theory’. Perhaps there was a problem with the theory.’ [p183] He mocks winners of the Nobel Prize for Economic Science in a way that suggests he is not expecting to win in the near future. For instance: ‘In 1998, the hedge fund Long Term Capital Management (LTCM) failed, although its senior management team comprised two Nobel Laureates in Economic Science, Myron Scholes and Robert Merton, and an experienced practitioner in financial markets, John Meriwether. ...The choice of assets was based on sophisticated statistical analysis of high frequency date over a decade or more. But ...when a rare but significant event occurred – the Russian default and devaluation of 1998 – past correlations proved a poor guide to asset returns….At the heart of modern macroeconomics is the same illusion that uncertainty can be confined to the mathematical manipulation of known probabilities. To understand and weather booms and slumps requires a different approach to thinking about uncertainty.’ [p121]

Another example was the alleged resolution of the search for Adam Smith’s “Invisible Hand” which to my own mind recalls Douglas Adams’ Restaurant at the End of the Universe: ‘Then, in the early 1950s, two economists , Lenneth Arrow and Gerard Debreu, both working in America, finally produced a rigorous explanation for the invisible hand (for which they were subsequently awarded the Nobel Prize). They imagined a hypothetical grand auction held at the beginning of time in which bids are made for every possible good and service that people might want to buy at all future dates. … Because the auction at the beginning of time has done its job, no market needs to reopen in the future. ... Central to the Arrow-Debreu view of the world is a special way of dealing with uncertainty about the future. ... In other words, radical uncertainty is ruled out by assumption. Obviously there are many ways in which the world is very far removed from this abstract description, apart from the obvious impracticability of organising the grand auction. Two are of particular importance – the need for institutions to police a market economy and the nature of uncertainty.’ [pp79/80]

As a banker, King seems especially annoyed at the failure of classical economics to appreciate the importance of money and the sterling labours of a central banker like himself. In discussing the Arrow-Debreu grand auction he writes ‘… There is no need for money to act either as a medium of exchange (the ‘double coincidence of wants’ problem is circumvented by the auction), a store of value (there is no requirement for a reserve of savings), or indeed an absolute standard of value (consumers bidding in the auction need only know the relative prices of different goods and services, including labour). Money has no place in an economy with a grand auction. ...’ [p79] Elsewhere he moans: ‘It is ironic... that economists who believe that money matters (for example, Milton Friedman) argue that ‘the demand for money is highly stable’, whereas Keynesian economists argue that money does not matter because demand is unstable. Both groups are wrong – money really matters when there are large and unpredictable jumps in the demand for it.’ [p182] This of course is where our caped crusader comes in.

What King complains about in classical economics is – or includes – the delusion that there can be a well defined, rational explanation for economic behaviour which, once properly understood, permits prediction and hence effective economic management. He contrasts this unduly rationalist model with an irrational one: ‘The main challenge to the economists’ assumption of optimising behaviour comes from ‘behavioural economics, a relatively new field associated with Daniel Kahneman, Richard Thaler and Amos Tversky. It studies the emotional and psychological dimensions of economic choices. … Daniel Kahneman suggested that decisions are made by two different systems in the mind: one fast and intuitive, the other slower, deliberate and closer to optimising behaviour. In this way he was able to explain aspects of behaviour that appear anomalous in the traditional approach.’ [p132] But King is not impressed by this perspective and writes ‘But simply patching up the optimising model by making the decision process more complicated – adding an intuitive to a rational self – in order to explain particular observed anomalies does not mean that it is likely to perform better in explaining future behaviour. … A complicated explanation of the past makes it no more likely that we can predict the stock market over the coming year than simply tossing a coin.’ [p132-133] He is clearly right to say that one cannot deploy Kahneman as a technical fix to repair the classical model of the rational market, but he is wrong to equate “irrational’ with ‘stupid’ as he does. Indeed, he cites evidence that, in practice, many financial decisions are based on emotion and not pure reason. Kahneman did not say we are stupid but that in practice it is not possible to make decisions in a deliberative, rational manner and we need other strategies. These may lead us to make characteristic types of mistake for which we may find some protection when we understand them better, but those mistakes are often a fair trade off in order to enable us to make decisions at all and not be paralysed.

This matters because King continues to argue: ‘… we need an alternative to both optimising behaviour and behavioural economics. What does it mean to be rational in a world of radical uncertainty? Once we are liberated from the view that there is a single optimising solution, rules of thumb – technically known as heuristics – are better seen as rational ways to cope with an unknowable future. … Ignoring information is rational when it is likely to be of little help in solving the problems we confront – sometimes less is more. Heuristics are not deviations from the true optimal solution but essential parts of a toolkit to cope with the unknown.’ [p134] He is certainly right but this is more or less what Kahneman was saying in his classic book, Thinking Fast and Slow. Actually, it is also a variant of what is argued in another book that is not mentioned: Fuzzy Logic: The Revolutionary Computer Technology That Is Changing Our World by Daniel McNeill, Paul Freiberger. King really does need to join up with Goodreads. The essence of fuzzy logic is that instead of a rational plan dealing with all eventualities, which will almost always turn out to be problematic, decision making is a process that continues across time, continually adjusting to meet changing conditions.

‘A coping strategy comprises three elements - a categorization of problems into those that are amenable to optimising behaviour and those that are not; a set of rules of thumb, or heuristics, to deal with the latter class of problems; and a narrative. … [135] .. The narrative is a story that integrates the most important pieces of information in order to provide a basis for choosing the heuristic and the motive for a decision.’ [136] For example, Dennis Wetherstone, CEO of JP Morgan, made it a rule that if he could not understand a new financial product after three, 15 minute presentations, then the firm refused to sell it.

‘Delegating monetary policy to an independent central bank with an inflation target is a coping strategy. Its clarity and simplicity mean that the target provides a natural heuristic for central banks and the private sector. … The great attraction of an inflation target is that it is a framework that does not have to be changed each time we learn something new about how the economy behaves. [p170]

King provides a positive account of the achievements of banking in general, and central banks in particular, with the implication that, of course, we need to continue learning from experience and improving over time. He offers possible modifications to the way Central Banks regulate money and finance which will certainly have a keen audience and may even save the world – who knows? However, mistakes are unavoidable and King explores a range of different financial crises over several centuries from which he observes: ‘Each crisis has its own distinctive pattern. No two are the same.’ [p307] He also remarks that it is a general rule that each country learns only from its own crises – which leads to the wrong solutions offered for the wrong crises. He makes an especially important distinction between financial crises arising from lack of liquidity – a type of problem for which central banks have excellent solutions – and those arising from structural problems that are unsustainable - which require political and economic solutions that may be at odds with the first. The latter danger arises when a financial crisis which requires economic adjustment is held at bay by throwing more money into the ring, not only deferring the necessary adjustment but also allowing the structural problems to escalate.

On this basis, King looks at the financial crisis of 2007/8 and suggests that the immediate crisis, in which central banks supplied the liquidity necessary to prevent economic catastrophe, masked a major, structural defect in the global economy which is not yet getting the attention it requires and for which different solutions are essential. This can be simplistically stated – China and Germany have economies which export too much and consume too little, leading to massive savings that are invested in other countries which save too little and consume too much. This structural disequilibrium is not sustainable and a correction will have to take place one way or another. For example, he writes: ‘ Unless it finds a way to allow its real exchange rate to appreciate – by leaving the euro area or somehow engineering a much higher rate of wage inflation than in other parts of the euro area – Germany will find that continuing trade surpluses mean that it is accumulating more and more claims on other countries, with the risk that those claims turn out to be little more than worthless paper. That is already true of some of the claims of the euro area as a whole on Greece. Both China and Germany are discovering that being a country in surplus is a mixed blessing in a world that is on an unsustainable trajectory.’ [p364]

King is thus able to point a very striking finger at governments that argue to their own electorate that their responsible management of the local / national economy is being put at risk by the crazy policies of Johnny Foreigner. ‘The weakness of demand across the world means that many, if not most countries can credibly say that if only the rest of the world were growing normally then they would be in reasonable shape. But since it isn’t, they aren’t.’ [p347,8] This is one reason why King puts a lot of weight on the Prisoners Dilemma in his book. He argues that there are no national solutions and only international ones, which governments are sadly unwilling to entertain. Instead, they are pursuing economic policies that put off the day of reckoning to beyond the next election but which will inevitably alienate and enrage their electorates, who are turning – he feels as a direct consequence – to fringe political parties out of disillusion with the mainstream political elites.

If governments are unwilling to make the key economic choices, one possible remedy might be to delegate economic management to central banks and rely on their technocratic expertise to sail the ship. In fact, King seems to believe this is entirely wrong and politically irresponsible and dangerous. Central banks have a valuable role to play but so does democracy and accountable government. For example, writing of the European Central Bank [ECB] and the euro, he says this:

‘...The ECB has had to choose between allowing the euro to fail and becoming a politicised institution. Naturally it chose the latter. In years to come that may return to haunt the bank if there are attacks on its independence for straying into political territory.’ [p231]

‘… in the euro the fight for survival has become a battle between politicians and arithmetic. Although the future outcome is unknowable, history is on the side of arithmetic. The tragedy of monetary union in Europe is not that it might collapse but that, given the degree of political commitment among the leaders of Europe, it might continue, bringing economic stagnation to the largest currency bloc in the world and holding back recovery of the wider world economy. It is at the heart of the disequilibrium in the world today.’ [p248]

On the broader economy, if King’s recommended policy measures are the correct ones and the only available ones, then there is no good news for the political Left, although there is not a lot of comfort either for the political Right. That makes it all the more helpful that he is so clear about the importance of the political process and democratic accountability in the decisions that need to be taken. If we adopt his concept of a coping strategy, which I feel is excellent and non ideological, then we could potentially agree with his strategic goals – to resolve the unsustainable disequilibrium in the global economy and to ensure that the risks involved in money and banking are correctly identified and borne by those who enjoy the benefits from our financial system– while offering alternative ways of arriving at a more sustainable vision for the future, something less like a plutocracy and less environmentally destructive. It is always best to be wary of writers who claim to think more than they feel. ...more

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Jun 23, 2016 Mehrsa rated it really liked it

King could not have had better view of the banking sector for the past several decades and if you haven't read an analysis of the crisis, this would be the one to read. It's not just that though. He also covers the basics of money, banking, and central banking. The premise is that though we seem to know capitalism well, we don't quite understand money and banking. In fact, the field of economics has stopped talking about it altogether. King wades in as a clear thinking guide. It will likely tak ...more

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Sep 14, 2016 Marks54 rated it really liked it

Somebody wise once advised me to read books in clusters that were somewhat but not completely related. Given the proliferation of books about the financial shocks of 2007-2008 and following years, that seemed like good advice and that is why I have read this in conjunction with Stiglitz's book on the Euro. Both are excellent and well written books that do a wonderful of communicating some complex issues and convoluted fact patterns.

King is the former head of the Bank of England and a Somebody wise once advised me to read books in clusters that were somewhat but not completely related. Given the proliferation of books about the financial shocks of 2007-2008 and following years, that seemed like good advice and that is why I have read this in conjunction with Stiglitz's book on the Euro. Both are excellent and well written books that do a wonderful of communicating some complex issues and convoluted fact patterns.

King is the former head of the Bank of England and addresses the vast array of problems associated with the crisis in terms of banking - especially central banking. This is not to minimize the role of political, technological, and other economic matters but more because that banking, while having a central role in the crisis, is the medium through which all the other crisis areas interact as policy makers seek to cope. The intuition is laid out at the beginning as an observation from a Chinese official that the west has figured out how capitalism works but still has issues coming to grips with problems of banking and finance. By "alchemy", King is referring to many of the central function of banking that rely on stable expectations and routines but that lead to chaos in times of "radical uncertainty" and significant instability. For example, banks lend out their deposits for longer term uses, so that if depositors all wanted their money back at once, it would not be there and the bank would fail. But most of the time, depositors don't want their money all at once, so there is no issue. Deposits can be lent to riskier purposes to increase returns and there is little worry, since depositors will not want their money all at once - until they do. Another example of this comes from the subprime crisis - bankers did not really worry about the capacity of borrowers to pay their mortgages, since in the event of a default the house could just be sold and the value applied to the load. ...and since mortgage customers are diversified, the losses from one default would be offset by the gains from the many more who repaid -- until they were not, since large number of subprime mortgages all failed at around the same time. Alchemy refers to banking practices developed in stable times to provide a return for bankers that lead to ruin with global bank consolidation and financial instruments premised on extremely rational parties who ended up not acting rationally. This gets developed in detail in the book and is well worth the effort to follow.

King is skillful at linking together the various strands of the overall financial crises. He does a good job linking the fall of Communism after 1989 to the rise of China and the influx of excess money into the financial system looking for high returns. He also ties in problems with the Eurozone, the US subprime and banking crises, the reduced productivity that seems to be further limiting growth worldwide, and the changing politics of nations and international organizations that are trying to address all the problems at once. A key claim he makes is that all of these factors combine in the context of "radical uncertainty" (following Knight's distinction of uncertainty versus risk) to produce a world where fundamental institutions need to be changed if future crises are to be avoided or at least mitigated.

The trouble is that King is convincing about the scary complexity of all of these balls being in the air at once, leading to the question of how fundamental institutional reform will occur when the major players have enough trouble just badly "muddling through" the mess. King seems to come to this conclusion at the end, where he hopes that the direness of failing to reform should scare policy makers into making hard choices (good luck with that). King makes a provocative link between developments in the recent crises and the trajectory globally following the Great Depression of the 1930s. History does not repeat itself, but the similarities are troubling.

My only major issue with the book is that in a volume like this, it is an accomplishment to get all the issues clear out on view. To tie everything together will take more detail - and more books. I hope King is up to the task and I look forward to his observations on how matters develop. This is one of the more stimulating books available on the global crisis anywhere. ...more

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Nov 11, 2017 Diego rated it it was amazing

Shelves: finance, economics-capitalism

Mervyn King has the experience to back up his theories regarding the cause for the global recession and potential solutions for the future success in global banking. Being the former governor for the Bank of England, he has a view that is lacking from most books on banking. Most books focus on the issue in Wall Street only, but the issue and impact is worldwide. He discusses the problems in the European Union with a common currency and other members’ debt. Sounds as though much of their issue is ...more

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Aug 11, 2018 Tuncer Şengöz rated it it was amazing · review of another edition

Shelves: finance

One of the best books on money, banking system, economic crises, and central banks, I have read recently. It took only one week to finish the book, though I read some paragraphs twice to grasp the idea. Yet this book is worth reading twice.

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Apr 11, 2017 Pedro L. Fragoso rated it it was amazing · review of another edition

I’ve been a frequent reader of books about our current financial predicament, which entered into high gear in 2007/8. Prof. Michael Hudson’s “Killing the Host” was and still is the best of the lot, but the books by James Rickards and Varoufakis’ “And the Weak Suffer What They Must?: Europe's Crisis and America's Economic Future” were also particularly remarkable. There were a number of others (and more in the reading list, even if right now my priority is travelling to the moon and accompany the I’ve been a frequent reader of books about our current financial predicament, which entered into high gear in 2007/8. Prof. Michael Hudson’s “Killing the Host” was and still is the best of the lot, but the books by James Rickards and Varoufakis’ “And the Weak Suffer What They Must?: Europe's Crisis and America's Economic Future” were also particularly remarkable. There were a number of others (and more in the reading list, even if right now my priority is travelling to the moon and accompany the travails and adventures of the remaining elements of the Corta family). I’m stating this to give a punch line and here it goes: “The End of Alchemy”, by a ultimate insider, the former governor of the Bank of England from 2000 to 2013, is among the very best and definitely, for anyone interested in understanding the fundamentals of our present and the winding roads of our immediate futures, required reading.

In The Economist’s March 10, 2016 review of the book it is stated that Mervyn King “does a good job of putting complex concepts into plain English. The discussion of the evolution of money—from Roman times to 19th-century America to today—is a useful introduction for those not quite sure what currency really is. He explains why economies need central banks: at best, they are independent managers of the money supply and rein in the banking system. Central bankers like giving the impression that they have played such roles since time immemorial, but as Lord King points out the reality is otherwise. The Fed was created only in 1913; believe it or not, until 1994 it would not reveal to the public its interest-rate decisions until weeks after the event. Even the Bank of England, founded in 1694, got the exclusive right to print banknotes (in England and Wales) only in 1844.”

This is indeed one of the most fabulous aspects of the book, the nonchalant way complex concepts are competently explained in simple, understandable phrases. As in: “The prisoner’s dilemma may be defined as the difficulty of achieving the best outcome when there are obstacles to cooperation. Imagine two prisoners who have been arrested and kept apart from each other. Both are offered the same deal: if they agree to incriminate the other they will receive a light sentence, but if they refuse to do so they will receive a severe sentence if the other incriminates them. If neither incriminates the other, then both are acquitted. Clearly, the best outcome is for both to remain silent. But if they cannot cooperate the choice is more difficult. The only way to guarantee the avoidance of a severe sentence is to incriminate the other. And if both do so, the outcome is that both receive a light sentence. But this non-cooperative outcome is inferior to the cooperative outcome. The difficulty of cooperating with each other creates a prisoner’s dilemma.” Or: “Over the past twenty years, a wide range of new and complex financial instruments has emerged, expanding dramatically the scale of financial markets. These new instruments are elaborate combinations of the more traditional debt, equity and insurance contracts, and as such they are known as ‘derivative’ instruments. They package streams of future returns on a wide variety of investments, ranging from housing to foreign exchange. They are claims on returns generated by the underlying basic financial contracts and play a valuable role of filling in gaps in markets, offering new ways both to hedge risks and speculate on future price movements of the underlying contracts, such as stock prices." (…) “Examples of derivative instruments include forward and futures contracts (the purchase of a commodity to be delivered at a future date), options (the right to buy, or sell, a basic contract such as a stock at a given price on or before a given date), and swaps (where two parties exchange a stream of cash flows in different currencies or for different profiles of interest payments to hedge their other exposures). Many of these instruments have real practical value. For example, the Wimbledon tennis championships receives payments in dollars for broadcast rights in the United States. But almost all the costs of running the tournament are in pounds sterling, which creates a risk from unknown future movements in the pound–dollar exchange rate. That risk can be reduced, at a price, by contracting today to sell dollars for pounds at a specific date in the future and at a particular exchange rate. Many, if not most, companies benefit from similar transactions.” (…) “These included credit default swaps (CDS, where the seller agrees to compensate the buyer in the event of default of some named party), mortgage-backed securities (MBS, a claim on the payments made on a bundle of many hundreds of mortgages, sold to the market by the originator of the mortgages, often a bank), and collateralised debt obligations (CDO, a claim on the cash flows from a set of bonds or other assets that is divided into tranches so that the lower tranches absorb losses first and the higher last, with investors able to choose in which tranches to invest).” And, to the point, “Derivatives also allowed a stream of expected future profits, which might or might not be realised, to be capitalised into current values and show up in trading profits, so permitting large bonuses to be paid today out of a highly uncertain future prospect.”

This alone makes this the go-to book to start any reading list on the subject. Not only do we get an unsurpassable contextualization of the crisis, we also get clear elucidations, instead of obfuscations, of all the relevant concepts at play to fully understand what’s actually going on. I find this an amazing, almost unbelievable achievement.

Then, we have quotes, anecdotes and little stories that are as delightful as they are relevant, delivered in elegant writing. This is when deep admiration for the intelectual prowess we are witnessing becomes unmitigated awe. I mean details such as: “It is rather like watching two old men playing chess in the sun for a bet of $10, as one can in Washington Square in New York, and then realising that they are watched by a crowd of bankers who are taking bets on the result to the tune of millions of dollars. The scope for introducing risk into the system rather than sharing it around is obvious. And that is why Warren Buffett described derivatives as ‘financial weapons of mass destruction’.” Or: “Charles Dickens’ novel A Tale of Two Cities has not only a very famous opening sentence but an equally famous closing sentence. As Sydney Carton sacrifices himself to the guillotine in the place of another, he reflects: ‘It is a far, far better thing that I do, than I have ever done …’ If we can find a way to end the alchemy of the system of money and banking we have inherited then, at least in the sphere of economics, it will indeed be a far, far better thing than we have ever done.” Or: “This observation leads to what we might call the Maradona theory of interest rates.” (N.B.: Read the book!) Or: "The old world was illustrated by Lord Cunliffe, the Governor of the Bank of England during the First World War, who, when giving evidence before a Royal Commission on the size of the Bank of England’s gold and foreign exchange reserves, replied that they were ‘very, very considerable’. When pressed by the commission to give an approximate figure, he replied that he would be ‘very, very reluctant to add to what he had said’.”

There is much, much more, but I can hardly quote the whole thing…

The book is an important analysis. At times, I was reminded of the arguments of Rickards and Varoufakis, only presented with even more forceful reasoning, and this by a former governor of the Bank of England! (I can’t quite get my head around that; even Paul Krugman, in the New York Review of Books piece published in the July 14, 2016 issue recognizes that “King takes sides in a long-running dispute between mainstream economic analysis and a more or less radical fringe that rejects the mainstream’s methods—and comes down on the side of the radical fringe.” – huh, not quite, but let’s let it at that.)

The alchemy of the financial system, as diagnosed by the author is thus: "For centuries, alchemy has been the basis of our system of money and banking. Governments pretended that paper money could be turned into gold even when there was more of the former than the latter. Banks pretended that short-term riskless deposits could be used to finance long-term risky investments. In both cases, the alchemy is the apparent transformation of risk into safety. For much of the time the alchemy seemed to work. From time to time, however, people realised that the Emperor had far fewer clothes than the Masters of the Universe wanted us to believe. Once confidence in the value of money or the soundness of banks was lost, there was a monetary or banking crisis. As Bagehot wrote in Lombard Street, ‘The peculiar essence of our financial system is an unprecedented trust between man and man; and when that trust is much weakened by hidden causes, a small accident may greatly hurt it, and a great accident for a moment may almost destroy it.’ For a society to base its financial system on alchemy is a poor advertisement for its rationality. The key to ending the alchemy is to ensure that the risks involved in money and banking are correctly identified and borne by those who enjoy the benefits from our financial system.”

There are priceless pages about the moral hazard of the current banking arrangement, as in: “They would run down their liquid assets, relying instead on cheap central bank insurance – and that is exactly what happened before the recent crisis. The provision of insurance without a proper charge is an incentive to take excessive risks – in modern jargon, it creates ‘moral hazard’.”; or “The debate about whether banks are ‘too important to fail’ boils down to a simple question. Are banks an extension of the state, as they are in centrally planned economies, or are they part of a market economy? If the latter, then to correct for the social costs they impose on society in a crisis, banks should be made to take out compulsory insurance through the PFAS and have sufficient ‘loss-absorbing capacity’, on the liability side of their balance sheets, to reduce the implicit taxpayer guarantee to bank creditors. Only equity finance guarantees that capacity.” On Europe: “When confronted with such a range of unpalatable choices, the leaders of Europe react by saying, 'We don't like any of them.' So they have responded by muddling through and adopting the coping strategy of Mr Micawber (in Charles Dickens' David Copperfield), waiting for something to turn up. Since the future is wholly unpredictable, it is certainly possible that something might turn up. But it is hard to believe that it would be an improvement on facing up to the problem and providing a sustainable economic basis for monetary union.” And, “The tragedy of monetary union in Europe is not that it might collapse but that, given the degree of political commitment among the leaders of Europe, it might continue, bringing economic stagnation to the largest currency bloc in the world and holding back recovery of the wider world economy. It is at the heart of the disequilibrium in the world today.” And much, much more, all of it of the same calibre. Like in: “Germany faces a terrible choice. Should it support the weaker brethren in the euro area at great and unending cost to its taxpayers, or should it call a halt to the project of monetary union across the whole of Europe? The attempt to find a middle course is not working. One day German voters may rebel against the losses imposed on them by the need to support their weaker brethren, and undoubtedly the easiest way to divide the euro area would be for Germany itself to exit. But the more likely cause of a break-up of the euro area is that voters in the south will tire of the grinding and relentless burden of mass unemployment and the emigration of talented young people. The counter-argument – that exit from the euro area would lead to chaos, falls in living standards and continuing uncertainty about the survival of the currency union – has real weight. But if the alternative is crushing austerity, continuing mass unemployment, and no end in sight to the burden of debt, then leaving the euro area may be the only way to plot a route back to economic growth and full employment. The long-term benefits outweigh the short-term costs. Outsiders cannot make that choice, but they can encourage Germany, and the rest of the euro area, to face up to it.”

There is a very concrete proposal, which is admittedly not so revolutionary, to extinguish the “alchemy” factor that characterizes current banking arrangements worldwide, but I do not believe in its feasibility, as it entails giving more power to “high-quality public servants” instead of a more market based solution (I am with Bill Bonner in this: “an honest society needs honest money”), not that I don’t understand where he’s coming from, so no, thank you very much. Nevertheless, this is an immensely readable and genuinely important reflection, for which Mervyn King deserves recognition, admiration and gratitude.

“For centuries gold has been the most widely accepted form of payment. It is independent of government, and, ironically, governments themselves want to hold reserves in gold because they do not trust other countries to maintain the real value of claims denominated in their own paper currency.” ...more

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Apr 26, 2019 Vishal Kale rated it it was ok · review of another edition

Shelves: yet-to-read-have-purchased

For starters, this is a book for westerners, written by a westerner, and on a western topic. This is exclusively a Western / Developed Economy book only. While the pluses are distributed throughout – as in a brilliant paragraph on Page 360; the fact remains that the arguments presented in the latter half of the book do not make any sort of sense. I am sorry, I know he is a highly adept expert, but there is no other way to phrase this..The solutions are half-baked, not thought through, and error ...more

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Nov 06, 2016 Skylar rated it liked it

Shelves: non-fiction, history, finance

Mr. King clearly knows what he's talking about on monetary policy and bank regulation, but his public and fiscal policy recommendations detract from that knowledge. He dismisses the utility of government stimulus in the Great Recession, ignoring the fact that the US stimulus should have been much bigger, and could have been much more punitive on the banks. He also places too much faith in the IMF for dealing with crises in the developing countries, ignoring completely the IMF's role in causing t ...more

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Aug 02, 2018 Ayoub Makroz rated it it was amazing · review of another edition

Great book from Mervyn King, ex Bank of England governor. His main idea is that the magic of finance is governed by four main ideas : Radical uncertainty, disequilibrium, the prisoner's dilemma and trust. He also gives potential solutions to the stagnation of the world economy

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Jan 29, 2018 Mbogo J rated it it was amazing · review of another edition

A full library has been created out of the 08/09 global financial crisis. The books might differ in content and in prose but they all have a unifying theme. Blame game. There are those that blame Wall Street's greed and the folly of human nature, some blame regulators for being too lax and the tragedy of repealing the Glass-Steagall Act, others just blame the effects of too much debt... This book is not numbered among them.

If you want to understand the financial crisis and the genera ...more

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Dec 02, 2016 Tariq Mahmood rated it really liked it

Shelves: history, economy

The author has produced a very pessimistic view of the current state of economy before and after the great credit crunch of 2008. If the then Governor of Bank of England has categorised the western economy as inherently at fault than more doom and gloom is certainly on its way. The Far Rights slowly taking over power in the western world should start addressing these issue instead of blaming the Immigrants for somehow creating the current glum before their public really start to lynch them. The ...more

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Apr 06, 2016 Andrew rated it it was amazing

Shelves: politics-and-political-theory, economics-business-finance

The End of Alchemy: Money, Banking, and the Future of the Global Economy is a book by former Bank of England Governor Mervyn King, who was a principle participant in the global effort to combat the Great Recession of 2008. King has since retired from his position, and has written his first (and hopefully not last) book on the crisis. This isn't, however, one of the many timeline books of the recession, or about placing blame, or even absolving himself of responsibility. King instead focuses on n The End of Alchemy: Money, Banking, and the Future of the Global Economy is a book by former Bank of England Governor Mervyn King, who was a principle participant in the global effort to combat the Great Recession of 2008. King has since retired from his position, and has written his first (and hopefully not last) book on the crisis. This isn't, however, one of the many timeline books of the recession, or about placing blame, or even absolving himself of responsibility. King instead focuses on needed reforms in global central banks that could successfully combat potential economic downturns, and help economies become more dynamic.

King first explains the in's and out's of banking, and then talks about major principles of banking, such as monetary policy, liquidity of capital, Lender of Last Resort tactics, panic, and monetary unions are all mentioned. King focuses in detail on the UK, USA and European Central bank, but also offers detail on banking in other nations, such as Australia, Japan and Canada. King has written a book on central banking policy itself, not necessarily focusing on any one region. King goes through each individual principles in a chapter, offering a history and explanation of the concept, and then proposed changes that could lead to greater financial stability. For example, he offers potential reforms of the European monetary union, such as allowing southern Periphery states to "burn out" and eventually recover, or greater political integration in Europe, or a transfer of capital from richer northern states like Germany to shore up southern nations, or harsh austerity measures until capital and confidence return, or a disintegration of the union itself. Another example is his critical take on Lender of Last Resort (LOLR) principles, which may help solve a banks immediate financial issues, but will encourage others to pull funding, and may even speed up a bank run. Instead, King talks about a Pawnbroker for all Seasons principles, where central banks proactively offer haircut backing to banks before any financial crisis happens.

King's book offers insight and reform ideas on everything from inflation targeting, to interest rates, to the relationship between government monetary policy and central bank independence. The End of Alchemy is an excellent read for those interested in monetary policy, and offers insight and reform options from a veteran central banker from one of the worlds largest economies. King's book is complex, however, because it is written entirely in economic lingo. There are few mathematical equations, but there is a lot of side research one may need to do if they have little experience or depth of knowledge in regards to global economic policy (read: me). Even so, the book is well worth your time. It is interesting, well written, and surely will be influential as governments seek to avoid a large scale downturn a la the Great Recession, and look to prevent crisis from happening again. A great read, and highly recommended. ...more

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Jul 10, 2016 Dave Peticolas rated it really liked it

Very thoughtful and clear-sighted analysis of the late-2000 financial crisis and Great Recession. Although King was a key figure at the time, this is not a blow-by-blow account of the events nor a search for immediate blame. King is looking for the deeper causes of what happened and how to prevent such crises in the future. He also presents one of the most lucid accounts of the underlying structural problems that led to the crisis and subsequent recession that I have read. I'm not enough of an e ...more

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May 17, 2016 Ben Irvin rated it really liked it

Shelves: economics-read

This is now my fifth book in the series on macroeconomics. I do recommend it although I initially was not so sure. King was head of the UK central bank from 2003-2013, so he certainly has experience and deep knowledge of what can and did happen with banking and the world economy. I liked the book ultimately because of the several good insights I gained and because it challenged, to some degree, the predominant thinking that earlier books in the series had tended to agree on. King's writing is fl This is now my fifth book in the series on macroeconomics. I do recommend it although I initially was not so sure. King was head of the UK central bank from 2003-2013, so he certainly has experience and deep knowledge of what can and did happen with banking and the world economy. I liked the book ultimately because of the several good insights I gained and because it challenged, to some degree, the predominant thinking that earlier books in the series had tended to agree on. King's writing is fluid and relatively crisp, though not all parts are equally engaging. So what did I learn:
- alchemy here has a very specific meaning: King uses it to characterize the conversion of short-term into long-term obligations, specifically the fact that banks accept deposits which they are obligated to return upon demand (short-term) and they make risky loans on which they agree to accept repayment over the long term. He proposes a specific path to eliminate the risk inherent in this enterprise which involves making sure that the value of a bank's assets (loans and reserves) _as collateral_ is at least equal to the value of their debts (deposits). With that value established, the Central bank can trade cash for those properly valued assets like a pawnbroker at any time that the bank might need liquidity to satisfy its depositors demands. This notion is not so radical since banks are already going this way with the large reserves that they have with the central banks as a result of the Quantitative Easing operations of the last few years. (The money created by central banks in this process has almost all gone into reserves rather than being "spent" in the economy the rest of us see, thus it has not stimulated demand directly). Whatever the means, as long as we rely on this alchemy, we will be subject to banking crises of the sort that developed in 2007-2008 and have occurred for centuries as long as banks have been allowed to operate this way.
- King incorporates much of the best literature on banking and economics going back into the 18th, 19th and 20th centuries. None of this stuff is new at some level, smart people have been warning of the risk and temptations of creative financing for a very long time. And there are lessons to be drawn from the history of crises.
- He posits that not all recessions are the same (kind of like cancers) and so the remedies are not all the same either. What works for some may not work for others. The example of the recession in the US that followed WWI is one that basically healed itself, and is often cited by people who claim government or central bank involvement is not needed to help end recessions. But he explains why that recession was a type that was self-healing while others are not.
- The deepest theme of King's work here is the necessity to cope with what he calls "radical uncertainty" in contrast to the notion that economic outcomes can be improved by just rationally optimizing choices to maximize the probability of achieving desired results. He contrasts these two in the pithy terms of an economy of "stuff" and an economy where "stuff happens." Radical uncertainty means no quantitative model can get you very far because the stuff that happens cannot even be imagined, much less quantified and modeled. I think related to this shortcoming of contemporary economic theory is the absence in its models of the roles of money and banking. Indeed they are very hard to model and, it seems, not very well understood in any scientific sense.
- Anyhow, in a world of radical uncertainty, one is better off the follow heuristics than to rely on complex mathematics, since the latter will seduce you into thinking you understand better than you do, while the latter, as obvious approximation and coping tools, can be more readily questioned and adjusted, at least in the best case.
- He identifies a key characteristic of an economic regime in the "narrative" that the participants tell themselves. Before the 2008 crisis many participants (households) subscribed to a narrative in which their growing spending could be sustained more or less indefinitely through borrowing because house prices would always rise . After the crisis hit, that narrative was replaced by one where more savings was needed along with the requisite unwinding of debt. I think his point is that monetary or fiscal stimulus may not be very effective to increase demand, for example, if the players in the economy don't buy the change in narrative that such stimulus is supposed to drive. Furthermore, the heuristics that are dominant are a function of the narrative. These qualitative concepts may be more effective in trying to manage through economic developments than flawed mathematical models.
- But I think King's politics may be steering him around certain factors that other writers have called key to the problems in current developed economies. Only one time in the entire book did I see the term "income inequality" cited, and that was in a laundry list of ills. In many of his characterizations of how economic forces play out he ignores the existence of the large chunk of society that has little capacity to save or to borrow but is instead living hand-to-mouth. I found his arguments and logic to be pretty good when thinking about the actions of a person in the upper middle class or above, but not so much for those whose spending is simply income-constrained. I take issue with his early (in the book) characterizations that pre-2008, spending was getting ahead of what was sustainable and that spending was "digging a hole" in future spending since it was debt-enabled. I ask (along with Adair Turner, author of Debt and the Devil) why should it be that healthy growth rates can only be sustained by increasing debt? King just seems to accept in a passive way that if debt was required to fuel the growth then it was excessive. Turner and Reich point to the excessive capture of growth by the top earners, who save rather than spend, as a source of the accumulating deficit in capacity to spend by the rest of the population, which leaves them with the choice of reducing spending trends or turning to debt.
I think King actually has some good insights into the difficulties of maintaining growth, but in ignoring the role of the distribution of spending power and the different ways the wealthy handle their income vs. the masses, he leaves a critical hole in his story. Since with many other competing views he is ready to explain (often convincingly) why they are flawed, his silence on this one is puzzling. ...more

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Jun 18, 2017 Adrian rated it really liked it · review of another edition

The former Bank of England Governor gives a suprisingly readable account of his understanding of the serious underlying faults in modern finance. While there exists a plethora of books on finance since the crash of 2008, this one stands out for 2 reasons. First, it's by a former Central Bank chief, Second, Lord King has some interesting recommendations.
King suggests that Central Banks, rather than being Lender of Last Resort, should instead be Pawn Broker for All Seasons, and in the last c ...more

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Jul 06, 2017 Sarah Toney added it · review of another edition

An incredible book on the role of central banks, how money and our economies work, and the intrinsic nature of boom/busts in our current system. While I don't agree with everything, this book provides a real foundation for understanding our economic reality and what needs to be done to shift to a more stable money system that will support the real economy and real people. I believe it's important for us to understand our economic world so that we can powerfully stand up for our own best interest ...more

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Apr 13, 2016 Pieter rated it really liked it · review of another edition

Shelves: economie

The year 2008 led to the worst financial crisis we have ever had at least since 1929. Until now, both central banks and governments struggle to recover. Money has been used unwisely, because politicians were unwilling to take unpopular decisions. Like doping, trying to hide overconsumption, increasing private and government debt.

A case study is the European Monetary Union for which it was not longer required that inflation would converge or budget deficits would belong to the past. G The year 2008 led to the worst financial crisis we have ever had at least since 1929. Until now, both central banks and governments struggle to recover. Money has been used unwisely, because politicians were unwilling to take unpopular decisions. Like doping, trying to hide overconsumption, increasing private and government debt.

A case study is the European Monetary Union for which it was not longer required that inflation would converge or budget deficits would belong to the past. Germany forced itself into a 'cheap' conversion rate while Southern European countries used increasing prices to further inflate the ever lower interest rates. Since WW II, Europe has not been as divided as it is today due to the euro.

It is most enlightening to hear the opinion of the former Governor of the Bank of England who was captain at a rough sea. And how interesting the book may be, in the end the question remains why has Mr. King not been able to lead the British vessel into safer waters after all?

I fully support his opinion that banks should be split up between 'narrow' and 'wide' banks, whereby the one focus on deposits while the other takes more risk. Banks should be better capitalised and be more prudent. It is not the task of the national tax payer to help out any corporate bank who focused on high bonuses at any risk, but at the same time looking for a cheap bail out.

But I wonder whether the author's idea to let the banks offer the central bank sufficient collateral (central banks as pawnbrokers) is the right solution. It is correct that the value of the collateral is not necessarily related to the creditworthiness of the bank. But take the case of a bank owning a portfolio of houses and vessels as collateral. The moment hell breaks loose, the bad economy will lead to a fall of the housing and vessel prices too. Wonder which central bank would then be willing to provide the suffering banks with liquidity?

Solvency should be key for any bank and regulation should be in place to make sure no freeriders join the rally, central banks could cool down the financial markets with sufficient liquidity if required. ...more

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Nov 11, 2016 Janp rated it liked it

Shelves: economics

"Brimming with new ideas....brilliant" reads the cover of the paperback I bought. There's two main ideas: one being the central banks functioning as a 'pawner for all seasons' as opposed to a 'lender of last resort', second is more cooperation between central banks and simplifying the systems (end alchemy) to structure the economy better and thus preventing large crises like the one in 2008. (The latter being discussed very elaborately, sometimes repeating certain systems and events two or three ...more

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Feb 23, 2017 Kevin rated it liked it · review of another edition

There are a number of problems with Mervyn King's book. The first is the rote recitation of Adam Smith's origins of money in barter that are a fantasy that economists cling to despite extensive evidence pointing to money as credit, both social and otherwise as the start of a monetary system. (see Debt: the First 5000 years for a comprehensive look) While he does comment on the endemic fraud around the crisis, he does not address the role it played in and around the crisis. (Though I am unfamilia ...more

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May 12, 2017 AnnaG rated it liked it · review of another edition

Shelves: non-fiction, 2017

Mervyn King gives an articulately argued and detailed explanation of the orthodox banking religion ie that banks are socially useful and contribute significantly to human prosperity, rather than being a rent-seeking drag on true human endeavour. It is interesting that he acknowledges several times that economics has little predictive power and yet still quotes the wisdom of economists past to prescribe how the financial system should be treated.

If you have a positive view of banks an ...more

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Oct 24, 2017 Benjamin Biscarrat rated it liked it · review of another edition

A few good ideas in this book but much too long for my liking.
The author rambles on for long whiles.
Seems like it would be too complicated for someone new to finance and at times too simple for someone in finance ...
Would've preferred reading a summary of the most important ideas

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Aug 15, 2016 Yolanda Ruiz rated it it was amazing

Shelves: must-read

A surprising and must read book.

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Mar 14, 2016 Kirk Houghton rated it really liked it · review of another edition

As ex-Governor of the Bank of England during the 2008-09 world recession, Sir Mervyn King is better placed than anyone to give an inside account of the financial storm that nearly brought the western world to its knees.
Thankfully, he is happy to let others do that and has no intention of writing a special plea to the Bar of History for a sympathetic hearing. Instead, The End of Alchemy is an ambitious attempt to bring the theoretical world of banking to the educated man on the street without al As ex-Governor of the Bank of England during the 2008-09 world recession, Sir Mervyn King is better placed than anyone to give an inside account of the financial storm that nearly brought the western world to its knees.
Thankfully, he is happy to let others do that and has no intention of writing a special plea to the Bar of History for a sympathetic hearing. Instead, The End of Alchemy is an ambitious attempt to bring the theoretical world of banking to the educated man on the street without alienating the armchair economist.
At the core of King’s study is the very essence of banking, which, as we (should) know, is a confidence trick. Banks borrow short and lend long, a process known as ‘maturity transformation.’ In other words the £500 I deposit in a current account with HSBC (a liability for the bank) is transformed into a product with a higher yield in the form of a loan to somebody else (an asset). The problem is liabilities can be withdrawn at any time, whereas assets are often illiquid, long-term and risky. Those occasions when depositors panic about the value of a bank’s assets result in the dreaded ‘run’ that has characterised commerce since medieval times. As we saw in 2008 during the run on Northern Rock, the rational desire to withdraw money results in a stampede and a potential liquidity crisis that can affect the whole of the banking system. But is the government right to act as a Lender of Last Resort (LOLS) or should the implicit tax-payer subsidy (or bailout) be reformed?
Of course, nobody but traders in securities, derivatives and futures believe the taxpayer should be on the hook for reckless gambling, and King is interested in developing a system where central banks will act as Pawnbroker for All Seasons (PFAS) to bring sanity back to the finance sector. The policy of forcing banks to insure their assets with an agreed ‘haircut’ to value risk sounds good in theory. In this hypothetical scenario an investment bank selling dubious CDO-type securities would have to accept a haircut between 90 and 100% on defaults, meaning investors could see how much a bank is loaded with risky, illiquid assets. All parties would understand the percentage of the assets insured under PFAS and would accept the loss dictated by the haircut agreement. This scrutiny should force banks to keep more equity capital and stay clear of loading their balance sheet with obscure financial products at the expense of other more liquid (and sane) investments. LOLS would be a thing of the past.
The theory is sound, but this book is much more than a guide to the future and is just as commendable for its rich history and economical writing. Everything from the definition of money to the difference between ‘money interest’ and ‘real interest rates’ are explained in a concise language that escaped the author during his interrogations on the House of Commons Treasury Select Committee. Indeed, for some this may come as the greatest surprise, for King was often a man of few words in public. But underneath the text is a latent desire for posterity with many epic quotes underpinning the tone of the book. The European Union’s calamitous mismanagement and lack of political union to support a common monetary policy is a case in point: ‘The tragedy of monetary union in Europe is not that it might collapse but that, given the degree of political commitment among the leaders of Europe, it might continue, bringing economic stagnation to the largest currency bloc in the world and holding back recovery of the wider world economy.’ Clearly no fan of German intransigence on the issue of Greek repayments via austerity, King is right to remind the reader of the Allied Powers’ generous write-down of its WWI debt of 132 billion gold marks. By the 1932 Lausanne Conference, Germany had paid only 21 billion marks ‘most of which was financed by overseas borrowing on which Germany subsequently defaulted.’
Indeed, the European Union’s attempt at Economic and Monetary Union (EMU) is the one subject where the ex-Governor of the Bank of England is keen to predict the future. As the most ambitious currency bloc in the history of the world, the Eurozone is a shoddy compromise between political ideals and half-baked integration. Greece is the best example of how this incongruous state of affairs is storing up trouble for the future. In King’s view, ‘The real challenge is not the state of the public finances but a country’s external competitiveness.’ He gives the German Government four choices, all of which are political suicide:
1. Wait for unemployment in Greece to continue until wages and prices are depressed enough to restore competitiveness
2. Allow inflation to make headway in Germany in combination with option #1. This would see the value of the Euro plummet in the wake of an export-led recovery.
3. Abandon the internal devaluation in options #1 & 2 and declare a transfer union where the rich northern states subsidise the weaker southern states to plug full employment deficits
4. Accept a partial or total break-up of the Eurozone
Add in the current migration crisis enveloping Europe and the future looks like a toxic combination of high unemployment, persistent deflation and a return to nationalist demagoguery. No wonder the author is quick to remind us that Capitalism – far from perfect, but better than anything else - is ‘not an answer to problems that require collective solutions, nor does it lead to an equal distribution of income or wealth.’
So, should we all start hoarding gold? Current solutions are short-term in scope, and the reliance on ultra-low interest rates and quantitative easing has run its course in stimulating the recovery post-2009. King is keen to stress the problem cannot be solved by constantly injecting liquidity into a fragile market fighting against deflation. Instead we need to concentrate on raising future productivity and encouraging relative prices to move in a more sustainable direction.
He’s not wrong there, but the alternative suggestions for a way forward are the usual mix of supply-side reforms we hear at every Conservative convention – less regulation, a reduction of monopolies, policies to encourage entrepreneurship, less distortion in the tax system. This is perhaps the most disappointing aspect of the book and the main factor preventing a five-star review. How many times have these platitudes been recycled in the same meaningless language?
Furthermore, the rebalancing of the global economy will take monumental co-operation. The G8 countries can keep advising China to move away from export-led growth in favour of boosting domestic demand, but can any nation force this proud Confucianist civilisation to reverse centuries of cultural tradition? King’s insistence on restoring floating exchange rates is more realistic, but, again, will take a huge collective effort. These policy recommendations are not original, but sensible. We all know what needs to be done, but don’t know how to achieve the means to this ideal end.
As a former Governor of the second-oldest Central Bank in the world, Sir Mervyn King is also prone to forget the awful record of his contemporaries, especially the US Federal Reserve, where a lot of his personal friends have worked over the years. Yet as James Rickards points out in his excellent book, Currency Wars (2012), the Fed has failed to fulfil its basic mandates. Since 1913 the Dollar has lost over 95% of its value; it allowed up to ten thousand banks to close or be taken over during the Great Depression while bank assets dropped by almost 30 percent; it bailed out many insolvent banks during the 2008-09 crisis, ignoring the Bagehot principles of taking strong collateral for high-interest loans; and it has failed to get anywhere near its 1983 target of achieving 3 percent unemployment. Yet none of this gets a mention for understandable reasons, as the back-cover of the book comes with praise from Paul Volcker and Alan Greenspan – not the type of people you want to criticise when searching for endorsements to propel your work to number one on the Current Affairs chart.
The End of Alchemy may not be a perfect work or have the same impact as John Maynard Keynes’ The General Theory of Employment, Interest and Money (1936), but that is to misread the author’s intention. King is not addressing fellow economists, but the educated masses that turn out to vote in democratic elections across the world. There is something for everyone here, whether it be Chapter Four as an introduction to the workings of high finance (‘Radical Uncertainty: The Purpose of Financial Markets’); a history of monetary policy from early modern times (anybody remember the Latin Monetary Union of the nineteenth century?); or a concise summary of key macroeconomic topics that may have stayed on your shelf since undergraduate days.
Those disappointed by King’s refusal to write a personal account of the financial meltdown of 2008-09 should not be discouraged. This is not a cop-out, but an academic response from one of the key agents in the most recent financial crisis of modern capitalism. Historians will give a better analysis of his policies twenty years from now, but today we have an intellectual tour de force on our laps, and it would be myopic not to enjoy it.
...more

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Aug 20, 2018 InvestingByTheBooks.com rated it really liked it · review of another edition

The scope of this book is ambitious. Mervyn King, the former Governor of the Bank of England, aims to explain the financial crisis and the state of the global economy today, he proposes a reset of the construction of the banking sector and attempts to transform the understanding of economics to better function as a practical tool for central bankers and politicians. The book targets the “interested general public” and while the language is unpretentious and simple enough some background knowledg The scope of this book is ambitious. Mervyn King, the former Governor of the Bank of England, aims to explain the financial crisis and the state of the global economy today, he proposes a reset of the construction of the banking sector and attempts to transform the understanding of economics to better function as a practical tool for central bankers and politicians. The book targets the “interested general public” and while the language is unpretentious and simple enough some background knowledge of economics is advisable.

After a very promising and interesting introductory chapter covering the standard story of the financial crisis minus the blame game, a teaser of what King refers to as the alchemy in the banking sector plus a number of observations on today’s economic situation the book separates into two parts – the first addressing banking in chapter 2 to 7 and the second economic policy in chapter 8 and 9.

The discussion on banking is coherently structured but also a bit longwinded. The author presents a number of textbook type chapters on subjects like what money is, the function of financial markets, how a bank works, the role of a central bank and the relationship between nations and money. The chapters are eloquently written and it is obvious that the learned King enjoys expressing himself well and as a true Britt he’s using a fair amount of colonial dry humor.

At the same time the texts are nothing out of the ordinary. If you know something about for example maturity transformation in banks, optimal currency areas etc. this is pretty much how you would describe it. You cannot help but feeling that these chapters are there only as a long introduction to the author’s proposal around the banking system and when we get to this in chapter nine the book is already 250 pages long. The most interesting point in this “second introduction” is the emphasis on money and markets as tools to handle the fact that people due to “radical uncertainty” cannot foresee and plan the future.

In chapter 7 the text picks up pace. King suggests that Central banks should take on the role of “the pawnbroker for all seasons” for a banking sector with considerably lower leverage and that would be incentivized to hold more liquid assets. The main problem with banks, as the author sees it, is the inherent conflict between the leverage used in a fractional reserve system and the liquidity risks of these depository institutions. At the same time, we today have a situation of massively inflated central bank balance sheets coupled with an ineffective money multiplier. If the multiplier would normalize there could be a distinct risk of inflation and central banks would have to dismantle their balance sheets as a reply. If however bank leverage was reduced when the propensity to spend increased the central banks could sit on their inflated balance sheets indefinitely.

The less leveraged banks would still face some liquidity risks and the “pawnbroker” is there as a last resort but only as banks pay an “insurance fee” upfront and with significant risk adjusted haircuts. This would transfer much of the bank supervision and regulation from the legislator to the central bank – not an unexpected opinion from a central banker. The problem with the suggestion is in my view that the ROA of banks today is so low that to be viable as businesses using lower leverage they would have to double or triple fees and interest rates – not what the economy needs.

The ending chapters on economic theory present a more humble view of central banks as King suggests that the models used to understand and steer economies are wrong. In a way these chapters are less well structured and a bit repetitive but in my option more noteworthy. It is not everyday a senior central banker deviates from economic orthodoxy in this way and I wholeheartedly agree on the mixed blessings of today’s monetary policy. It is always a privilege to take part of the ideas of a man who has spent plenty of time to think deep and new on hugely important topics. You don’t have to agree to enjoy King’s important book. ...more

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Feb 21, 2018 Arno Mosikyan rated it really liked it · review of another edition

Shelves: economics-finance

QUOTES

The crisis was a failure of a system, and the ideas that underpinned it, not of individual policy-makers or bankers, incompetent and greedy though some of them undoubtedly were.

By alchemy I mean the belief that all paper money can be turned into an intrinsically valuable commodity, such as gold, on demand and that money kept in banks can be taken out whenever depositors ask for it. The truth is that money, in all forms, depends on trust in its issuer.

Fou ...more

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Jan 24, 2018 Douglass Gaking rated it it was amazing · review of another edition

Shelves: business-economics, politics, non-fiction

The End of Alchemy is the most comprehensive book on financial crises that has been published since the Great Recession. Mervyn King headed up the Bank of England during the 2008 Financial Crisis. However, unlike Timothy Geithner and Ben Bernanke, he doesn't set out to defend his actions during the crisis or make excuses for questionable decisions. Instead, King criticizes the system that allowed the crisis to happen, allowed the crises before it, and will inevitably create future crises if it is not c ...more

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Mar 06, 2017 Nilesh rated it liked it · review of another edition

Shelves: economic-and-finance

A disappointing book mainly because who it comes from. If a person with all the policy power possible, who could so clearly see whatever was wrong in the policymaking and still could do nothing, he should have written on practical issues that confound the decision-making and ways to get around them rather than offer more theories and theoretical solutions.

Theory, as is invariably the case with great economists, is good even if presented in the laymen language garb. Other academicians A disappointing book mainly because who it comes from. If a person with all the policy power possible, who could so clearly see whatever was wrong in the policymaking and still could do nothing, he should have written on practical issues that confound the decision-making and ways to get around them rather than offer more theories and theoretical solutions.

Theory, as is invariably the case with great economists, is good even if presented in the laymen language garb. Other academicians may find holes in the way money, finance, alchemy (lovely definition - illiquidity in real assets converted into financial liquidity) etc are defined. Practical critics may have issues with the liquidity-based capital adequacy formula provided for banks. Yet, those would be sparrings that economists will always do. One cannot take away anything from the author’s great understanding of the world of banking and finance, ability to describe his ideas most lucidly and provide a consistent framework.

The author’s failure is in recognising the real problem: it is not in economists’ faulty understanding or inability to agree. This is a real problem when looked from the viewpoint of the incessant bickering amongst them. Yet, every now and then, some Mr Keynes or Mr King do get the highest power. And yet, they are unable to implement what they believe in. There is more to policymaking than sound economic understanding. A point completely missed by the book.

Think about the three solutions presented towards the end for the global economy to begin growing:

- boost productivity by removing economic inefficiencies. Really? Isn’t this a solution to everything, everywhere!! To be fair, the author has a handful of statements against monopolies and for tax reforms but this is not befitting as a suggestion for a book of this calibre
- boost free trade through agreements like TPP…hmmmm (this review is in the Post-Trump era)…
- force everyone to have free-floating exchange rate. Really? One, who will get that done and two, how can the author forget about the carnage this can create to at least 190 out of 200 countries every decade or so.

Once again, maybe these are the solutions. And they must have been known to the author when he was in the powerful seat. A better book would be if the author explained why he could not do what he thought was right. Despite the beautiful paradox of policy explained in this book (succinctly, any economic policy that is overused fails), this reviewer strongly believes that there are many decent solutions to the current economic malaise. Almost all solutions have one thing in common: they need strict adherence to one single way of thinking rather than muddled mishmash of reactionary ideas. But in practical life, it is just not possible to stick to one way with the focus only on the long-term. There is a paradox of this reviewer here. Call it the paradox of policymakers: Any policymakers that simply focus on the long-term perfect solution dies as a policymaker long before he is able to implement anything. ...more

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Jun 12, 2018 Alex rated it it was amazing · review of another edition

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Jun 28, 2017 David Robertus rated it really liked it · review of another edition

Sir Mervyn brings several principles forward for how to reform the fractional reserve banking system. Along the way he lays out a number of issues with the system as it stands and points out how it has changed. He also points to certain causes, although in my opinion I feel he also skirts some blame that would be obvious to one who was more honest with himself, and were willing to point blame to colleagues and ideologies.

THe primary concept of reform is the notion of changing the rol ...more

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