Martin Wolf writing inÂ theÂ Financial TimesÂ has warned that there will be another financial crisis given the nature of the modern fractional reserve banking and financial system.Â Wolf asks whether there will a âanother huge financial crisisâ and then answers his question by saying that there will be andÂ warns that banks âare designed to fall. So fall they surely will.â
He warns that aÂ system built on making promises it cannot keep is bound to crash, and crash again:
Will there be another huge financial crisis? As Hamlet said of the fall of a sparrow: âIf it be now, ’tis not to come. If it be not to come, it will be now. If it be not now, yet it will come â the readiness is all.â So it is with banks. They are designed to fall. So fall they surely will.
A recent book explores not only this reality but also a radical and original solution. What makes attention to this suggestion even more justified is that its author was at the heart of the monetary establishment before and during the crisis. He is Lord Mervyn King, former governor of the Bank of England. His book is called The End of Alchemy.
The title is appropriate: alchemy lies at the heart of the financial system; moreover, banking was, like alchemy, a medieval idea, but one we have not as yet discarded. We must, argues Lord King, now do so.
As Lord King remarks, the alchemy is âthe belief that money kept in banks can be taken out whenever depositors ask for itâ.
This is a confidence trick in two senses: it works if, and only if, confidence is strong; and it is fraudulent. Financial institutions make promises that, in likely states of the world, they cannot keep. In good times, this is a lucrative business. In bad times, the authorities have to come to the rescue. It is little wonder, then, that financial institutions have become so large and pay so well.
HisÂ solution to the dangerous alchemy of the current banking system is to makeÂ Central banks pawnbrokers of last resort. This seems somewhat more prudent than the more dangerous deflationary experiment of bail-ins and confiscating deposits, both individuals and families life savings and indeed SME and corporate deposits above a certain level, in order to bail out failing banks.
Wolf joins a long list of investment and finance experts and even the PrimeÂ MinisterÂ of Japan who are warning that another global financial crisis is coming. The question is not if, but when.
Read full FT articleÂ via Irish Times here
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