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The End of Alchemy

Money, Banking, and the Future of the Global Economy

Mervyn King

W.W. Norton, 2016

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Being the chairman of the Bank of England during the worst financial crisis in generations will lead a person to form some pretty strong opinions, and Mervyn King doesn’t disappoint in his comprehensive anatomy of financial shocks. The former head of the UK central bank doesn’t hold back in his analysis of the roles of money and banking in an economy, and he pulls no punches in criticizing the central flaw in the global financial system: the alchemy of banks creating money out of thin air. King explains that this alchemy lies at the heart of capitalism but that it leads to crashes. Yet King is not just another fault finder; he proposes a new role for central banks to ensure that taxpayers are never again on the hook for bank bailouts. King has not produced an exposé, chronicle or justification of his own decisions, but rather this is a lucid treatise on how to manage future financial crises. His writing can be dry at times, although he does occasionally include vivid, revealing anecdotes drawn from his battlefield experiences in the trenches of the 2008 debacle. Bankers, economists and students of economic history will find this heavyweight text an educational deep dive into the financial sector and central banking.

Summary

Lessons from the 2008 Global Financial Crisis

Blaming the 2008 crisis on the titans of the financial industry is too easy. True, banks became overleveraged and overexposed to the property bubble, and they embraced derivatives and financial engineering on a scale that opened up a Pandora’s box of troubles. But these businesses were acting within systems that motivated them to produce results. Bankers risked losing their jobs if they and their companies did not match their peers’ profits. It was hard to be the bank that wasn’t making money from mortgage derivatives or the one not taking on more leverage and thereby benefiting from the government’s implicit too-big-to-fail insurance. The engineered instruments also tempted investors looking for outsized returns. These dual bank and market actions combined to exert pressures on the financial system and generate instability.

While traditional bank activity funds physical assets in the real economy, the engineering of derivatives can produce as many financial assets as desired, providing an extra lure for traders wishing to make big bets. The financial system now treats cash as a commodity and backs risky...

About the Author

Mervyn King was the governor of the Bank of England from 2003 to 2013. He is currently an economics and law professor at New York University and an economics professor at the London School of Economics.

The End of Alchemy

Money, Banking, and the Future of the Global Economy

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Summary

Lessons from the 2008 Global Financial Crisis

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