Review: “The End of Alchemy: Money, Banking And The Future Of The Global Economy” Mervyn King
King wrote his book immediately after retiring as governor of the Bank of England. He sets the tone on page one with an evocative quote: “Where is the wisdom we have lost in knowledge?/ Where is the knowledge we have lost in information?” (TS Eliot).
Despite – or because? – he was so close to the London financial sector’s undermining of corporate productivity and pillaging of global government tax revenues, his proposals for new central bank approaches are both practical and egalitarian.
Changing The Banking Rules
A central recommendation is for the reserve bank to guarantee short term bank deposits, backed by pledges of bank collateral against bankruptcy, and with that collateral assessed by the reserve bank at a safe proportion of its nominal value to cover cyclical price drops.
This avoids bank runs on cash since the deposits of savers and retirees are protected, while also leveraging today’s reserves created by quantitative easing and the assessment infrastructure created by central banks to hold and manage at-risk collateral held after the global financial crisis. Rules for banking leverage would be more transparent and harder to evade; the pledged value of assets at the central bank must remain above the value of liquid liabilities (defined as loans of a year’s maturity or less), and a safer maximum leverage ratio of at most 10 to one.
Reflecting on the global financial crisis, he says the UK’s central bank had intense internal debate about how to deal with sluggish growth and a large trade deficit from the late 1990s. With a choice between steady growth but increasing imbalances and a slowdown to a more sustainable path for domestic demand at the cost of rising unemployment, they chose growth and pushed the risk of a sharper downturn into the future.
In his final chapter, “The Audacity of Pessimism: The Prisoner’s Dilemma And The Coming Crisis”, he argues we now need to face up realistically to the deep hole which are in and its parallels to the 1930s slide from crisis into fascism. “Without reform of the financial system, another crisis is certain, and the failure to tackle disequilibrium in the world economy makes it likely that it will come sooner rather than later.”
The Need for Debt Forgiveness
He argues “the situation in Greece encapsulates the problems of external indebtedness in a monetary union. GDP in Greece has collapsed by more than in the United States during the Great Depression. Despite an enormous fiscal (spending) contraction, the ratio of government debt to GDP has continued to rise, and is now almost 200 per cent, denominated in a currency that is likely to rise in value relative to Greek incomes. The longer the austerity programme continues, the worse becomes the ability of Greece to repay.”
And “The inevitability of restructuring Greek debt means that taxpayers in Germany and elsewhere will have to absorb substantial losses. It was more than a little depressing to see the countries of the euro area haggling over how much to lend to Greece so that it would be able to pay them back some of the earlier loans. Such a circular flow of payments made little difference to the health, or lack of it, of the Greek economy. It is particularly unfortunate that Germany seemed to have forgotten its own history” (of unpayable debt after the First World War leading to fascism).
King concludes that the best solution may be for Germany to exit the euro, lowering the exchange rate and making remaining countries more competitive.
Global Institutions Need To “Lift Their Game”
He argues strongly for democratisation of the International Monetary Fund (IMF), change which has been undermined by the US to preserve its veto – particularly because global rebalancing between surplus and debtor countries will need a globally acceptable coordinating body with cooperative swap funds available to support the difficult transition to normal interest rates and balanced global exchange rates.
In relation to creating jobs, King has less practical experience and excludes many of the critical issues raised by writers reviewed above while including, for example, lowering the cost of public services. He does argue for reducing monopolies to increase competition and improving public infrastructure to support the economy.
And the final conclusion of this ex-governor of the Bank of England? “For many centuries, money and banking were financial alchemy, seen as a source of strength when in fact they were the weak link of a capitalist economy. A long-term programme for the reform of money and banking and the institutions of the global economy will be driven only by an intellectual revolution. It is the young of today who will suffer from the next crisis – and without reform the economic and human costs of that crisis will be bigger than last time. That is why, more than ever, we need the audacity of pessimism. It is our best hope.”