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Banking on the Future
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Banking on the Future

The Fall and Rise of Central Banking

Howard Davies and David Green
Princeton UP, 2010
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7

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  • Innovative

Recommendation

After the 2008 financial crisis, the world’s central banks had a lot of explaining to do. Housing prices had bubbled and burst, major financial institutions teetered (and some fell), and the global financial system came to a screeching halt. While central bankers were instrumental in preventing all-out economic Armageddon, none foresaw the magnitude of the crisis, nor were many armed with the right tools to fix it. Courtesy of their front-row seats at the parade of central banking’s modern evolution, Bank of England veterans Howard Davies and David Green, present a thorough insider’s parsing of the state of the field, and offer ideas for how the world’s top bankers can better prepare for – and maybe even avert – the next crisis. The authors’ subject matter is often prosaic, but they give it some much-needed livening up with their behind-the-scenes, sometimes gossipy, revelations about the personalities of the (almost all) men who helped keep the economic world spinning. getAbstract recommends their exposé to policy makers and bankers who want to take lessons from what went wrong and understand how to make it right.

Summary

The Mighty Have Fallen

Blame for the financial crisis that began in 2007 landed easily and plentifully at the feet of the world’s central banks. Few had drawn attention to the build-up in asset prices – particularly housing prices – and to the inherent flaws of derivatives, instruments intended to mitigate risk that instead amplified and spread contagion throughout the financial system. When sparks flew in the summer of 2007, central banks had little in the way of firefighting equipment to douse the monetary flames. Central bankers were caught flat-footed with interest rates close to zero, bank reserves insufficient and a “shadow banking” system out of their control. Yet how could the world’s monetary authorities have missed the signals of an impending crash? How was their “radar...not connected to the missile defenses?” Did their focus on inflation management and monetary stability blind them to the changing economic picture? Should they have focused on asset prices along with interest rates? Were they out of touch with rapidly advancing financial innovation? Were they ill-prepared to collaborate in a crisis, not only among their cross-border confreres but with their own...

About the Authors

Howard Davies is director of the London School of Economics. David Green is a Bank of England central banker and financial regulator.

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