Mending banks – The Economist (blog)
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ANYBODY looking for an insider account of the financial crisis is spoilt for choice. The recollections of Timothy Geithner, a former American treasury secretary, are packed with pulsating drama. A book from Ben Bernanke, a former chairman of the Federal Reserve, lacks the pyrotechnics but offers a robust defence of the Fed’s response to market meltdown. Mervyn King, who was the governor of the Bank of England in 2003-13, sees such “instant memoirs” as “partial and self-serving”. In “The End of Alchemy” there is no gossip and few revelations. Instead Lord King uses his experience of the crisis as a platform from which to discuss economic ideas, in a book written for the non-specialist.
He 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 only created 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, only got the exclusive right to print banknotes (in England and Wales) in 1844.
At times, Lord King is refreshingly frank. He is no fan of austerity policies, saying that they have imposed “enormous costs on citizens throughout Europe”. He also reserves plenty of criticism for the economics profession. Since forecasting is so hit-and-miss, he thinks, the practice of giving prizes to the best forecasters “makes as much sense as it would to award the Fields Medal in mathematics to the winner of the National Lottery”.
This is all perfectly interesting, and Lord King opines on a wide range of issues (though with more breadth than depth). But the real point of the book, it seems, is to propose reforms to global finance. The problem leading up to the crisis, as Lord King sees it, is that commercial banks had little incentive to hold large quantities of safe, liquid assets. They knew that in a panic, the central bank would provide liquidity, no matter the quality of their balance-sheets; in response they loaded up on risky investments.
Instead of this unhappy arrangement, Lord King wants banks to buy “liquidity insurance”. In normal times banks would pledge collateral to the central bank, who would agree to lend a certain amount on it, if necessary. Banks would thus know in advance precisely how much help they could get in the event of a meltdown, making them behave responsibly when times were good.
The argument is persuasive (indeed, some central banks already have policies with similar parts to the one Lord King is suggesting). However, there is something unsatisfying about a plea for radical reform from someone who has recently spent a decade in a position of exceptional power: if your suggestions are so good, the reader might ask, then why did you not push for them yourself? Lord King has produced a worthy book, but a shamelessly self-serving account of his role during the financial crisis would have been a lot more fun.
The End of Alchemy: Money, Banking, and the Future of the Global Economy. By Mervyn King. W.W. Norton; 430 pages; $28.95. Little, Brown; £25
Mending banks – The Economist (blog)}