Friday, July 15, 2016

Michael Lewis Book Review
On The End Of Alchemy
Michael Lewis* summarizes author Mervyn King’s ‘Glass-Steagall-like’ proposals on how to end the era of never-ending financial crisis & restore safety to bank deposits & a financial system as a stable utility in support of the real economy .. "The first thing that King thinks must be done is to separate the boring bits of banking (providing a safe place to deposit money, facilitating payments) from the exciting ones (trading). There is no need, he thinks, to break up the existing institutions. Deposits and short-term loans to banks simply need to be separated from other bank assets. Against all of these boring assets, banks would be required to hold government bonds or reserves at the central bank in cash. That is, there should be zero risk that there won’t be sufficient cash on hand to repay people wanting to flee any bank at a moment’s notice — and thus no reason for those people to flee .. The riskier assets from which banks stand most to gain (and lose) would then be vetted by the central bank, in advance of any crisis, to determine what it would be willing to lend against them in a pinch if posted as collateral. Common stocks, mortgage bonds, Australian gold mines, credit default swaps and whatever else: The banks would decide, before any crisis, which of their risky assets they would be willing to pledge to — basically, pawn with — the central bank. The riskier the asset, the less the central bank would be willing to lend against it. Any asset so complicated that it couldn’t be explained satisfactorily to the central bank in three 15-minute presentations wouldn’t be eligible as collateral. Everyone would know, if any given bank ever required a loan from the central bank, the size of the loan the central bank would be willing to extend. The central bank would go from being the lender of last resort to what King calls the pawnbroker for all seasons."
LINK HERE to the review

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