Alchemists of Loss: How modern finance and government intervention crashed the financial system
An engaging look at how modern finance almost destroyed our global economy
Over the last thirty years, capital markets have been restructured through the tenets of modern finance. This has been enormously profitable for the financial services sector. However, these innovations, coupled with unsound risk and regulatory practices have proved disastrous for the global economy.
In a clear and accessible style, ex-investment banker and financial journalist Martin Hutchinson, and highly respected academic, Kevin Dowd show how modern finance combined with easy money threatened to bring down the world financial system. At the heart of the book is modern finance as a U.S. invention, the theories and practices associated with them, and the changes they made in business models and risk management on Wall Street and other major financial centers.
- Breaks down the events involved in the 2007-08 financial collapse
- Reveals how botched policy response made a bad situation worse
- Focuses on lessons that the practice of finance must learn from recent events
The Alchemists of Loss will help you to understand how our financial system crashed and show you what it will take to make sure this won't happen again as we move forward.
Acknowledgements & Dedication v
Part One: Past Successes and Disasters 1
1 Introduction 3
2 Pre-Modern Finance 17
3 Lessons from Past Financial Crises 33
Part Two: The Modern Financial Theory Engine 63
4 Theoretical Foundations of Modern Finance 65
5 Modern Financial Theory’s Hideous Flaws 87
6 Risk Management: Daft Theory, Dodgy Practice 111
Part Three: Interactions with the Real World 137
7 The Real World Becomes Modern Finance-friendly 139
8 Modern Finance Captures Wall Street 159
9 And Wall Street Metamorphoses 199
10 Derivatives and Other Disasters 225
Part Four: Policy Accommodates Modern Finance 245
11 Loose Money 247
12 Government Meddling in the Financial System 269
Part Five: Götterdämmerung 295
13 Bubble, Burst, and Panic 297
14 The Slope Down Which We’re Heading 331
Part Six: Charting a New Way Forward 349
15 The Math of Proper Risk Management 351
16 Back to the Future – A New Vision of Finance 373
17 A Blueprint for Reform 389
18 Lessons to Take Away 403
Martin Hutchinson was a merchant/investment banker with more than 25 years’ experience in London, New York and Zagreb, beginning with the merchant bank Hill Samuel, before moving into financial journalism in 2000. After working for US, Swedish and Austrian banks, he was a director of a Spanish private-equity firm, an advisor to a Korean conglomerate and Chairman of a US modular building company. As the US Treasury Advisor to Croatia in 1996, he helped the country establish its own T-bill program, launch its first government bond issue, and start a forward currency market. He then set up the Corporate Finance Division for the Croatian bank Privredna banka Zagreb and advised the Republic of Macedonia on restitution of savings for 800,000 Macedonian savers.
In 2000 he moved into journalism, in October 2000 beginning his weekly column “The Bear’s Lair,” which now appears on the website www.prudentbear.com. He is currently a columnist for Reuters BreakingViews, writes for Agora Publishing’s financial website Money Morning and is editor of the Permanent Wealth Report. He has appeared on television on the BBC, Fox News, Fox Business, CNBC and RTV Slovenija. He is also the author of Great Conservatives (Academica Press, 2004) a study of the rise, triumph and decline of British Conservatism.
Hutchinson has a degree in mathematics from Trinity College, Cambridge, and an MBA from Harvard Business School.