IT IS a delight to read a book on money and banking as intellectually stimulating and lucidly argued as The End of Alchemy by former Bank of England governor Lord Mervyn King. A key mover of the global financial system, along with Federal Reserve’s Alan Greenspan, King presided over the Bank of England through the crucial decade of 2003-13, a period that saw the worst global financial crisis (2007-08) after a long period of unprecedented growth and stability. In this book, where “there is no gossip and few revelations”, King tells the story of how complacence slowly brewed the disaster, and looks for the brutal truth, begging the question: is money and banking the Achilles’ heel of modern capitalism? “Much of the financial history of the past 150 years is the story of unsuccessful attempts to maintain the value of money,” he says. More importantly, can we end the alchemy of money and banking?
King focuses on the “collective failure” for the banking collapse that caused “both Britain and the US to ‘lose’ around 15 per cent of national income relative to the pre-crisis growth path”. And the perils of risk-taking. Not for him the grand sweep of the I-told-you-so! This avuncular, soft-spoken gentleman made the Bank of England the most trustworthy institutional narrator of events in global finance. Yet, as King says, little have we learnt—the financial system still ensures that a handful of people at the top capture the benefits from risk-taking, while the entire society bears the cost.
“Regulation has become extraordinarily complex, and in ways that do not go to the heart of the problem… Much of the complexity reflects pressure from financial firms. By encouraging a culture in which compliance with detailed regulation is a defense against a charge of wrongdoing, bankers and regulators have colluded in a self-defeating spiral of complexity.”
King asserts: “Without reform of the financial system, another crisis is certain… sooner rather than later. Reform of money and banking will not be easy; most existing financial institutions, and the political interests they support, will resist strongly.” What then is the way out? King offers an “ideas” revolution. The most important of these ideas concern the nature of risk and the radical uncertainty that has become the hallmark of the global economy, and the burden of expectations.
King suggests that the central bank’s role as lender of last resort be replaced by that of “a pawnbroker for all seasons”, or, in other words, all deposits are covered by safe, liquid assets. He calls for reforms that require banks to do less, be far more transparent, and avert risk by posting much greater collateral with central banks as an “insurance”. “To retain credibility, it is important central banks do not claim to know more than they in fact do,” he says acerbically. In fact, their omnipotence is also fairly recent—the Fed was created in 1913 and, until 1994, it would not reveal to the public its interest rate decisions for weeks after.
King also comes down heavily on the single-currency system, “the most divisive development in post-war Europe…imposing enormous costs on citizens” in the form of stagnation and unemployment. “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,” he says. Post-Brexit, this ominous prediction seems to be playing out.
When a man who has been part of a system that once seemed unshakeable makes such radical observations, he needs to be heard, even though he was behind the long lowest-interest-rate regime. When he calls for the audacity of pessimism, he sounds sensible. “In the heat of the crisis in October 2008, nation states took over the responsibility for all the obligations and debts of the global banking system,” he writes.
“That government rescue cannot conveniently be forgotten. When push came to shove, the very sector that had espoused the merits of market discipline was allowed to carry on only by dint of taxpayer support.” Calling for conservatism on behalf of central banks, especially in ignoring the argument that government regulators have no business meddling in the private affairs of big banks, King says, “But central bankers are in a stronger position to resist such calls in normal times than after the crisis has hit.” In the context of the uncomfortable central bank-government relationship in India, King’s analysis is timely and apt.
King’s solutions may often seem simplistic, and even unworkable to many. Yet there is no doubt that this is one of the most important books to come out on the 2007-08 crisis. The pleasure that the reader gets from the vast sweep of global monetary system history painted by King, without a single table or graph, is rare indeed. For the sake of the young, who are set to take over the global economy everywhere, King’s book is worth a detailed read and deserves a wider audience.
Paromita Shastri is a former financial journalist