Years of loose monetary policy has left us vulnerable to another financial crisis, says Howard Daviesby Howard Davies / April 21, 2016 / Leave a comment
The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King, Little, Brown, £25
I have known Mervyn King for over 20 years. We worked together at the Bank of England in the 1990s. We then worked opposite each other when I was Chairman of the Financial Services Authority. I have observed him in his preferred habitats: a beautiful library attached to his home in Kent, and the
Directors’ lounge at Aston Villa Football Club. Yet until now, I had never suspected that he bought his socks at Harrods.
A thrifty man, King buys only in the sale, of course, but it is a surprising fact to discover in a treatise on money and banking in the 21st century—especially one which is as far from the “kiss-and-tell” memoirs of other central bankers and politicians as is possible. So I should explain that his socks enter the story as a kind of metaphor for sub-prime mortgage securitisations. In the sale, Harrods sold socks in packs of five and “when you got home you would discover at least one pair you would never wear (in my case, orange socks)… the set of five pairs was rather like a Collateralised Debt Obligation (CDO) that bundled socks instead of sub-prime mortgages.” The analogy is not exact. In the worst-performing CDOs, four and a half of the five pairs were unwearable, so to speak, but the point is well made.
As revealed in a decade of speeches while he was Governor of the Bank of England from 2003 to 2013, King has an enviable talent for describing complex problems in a straightforward and often witty way. It helps that he is remarkably well read. The End of Alchemy is dotted with apposite quotations from Charles Dickens, TS Eliot, Thomas Carlyle and John Bunyan, not to mention Vladimir Lenin and Mrs Patrick Campbell. Aston Villa, where he is now a Director, cannot be found in the index, but references to it have infiltrated a chapter on Economic and Monetary Union (EMU), where he notes that…