Mervyn King

Mervyn King believes we need to do better, and proposes the PAWNBROKER MODEL:

The model is very simple once somebody has told you about it and it amounts to a permanent, marked-to-rational-market pre-packaged TARP for all bank assets

In the future, Mervyn King recommends that every asset a bank holds should be assigned a shadow “haircut” that is assessed seriously and is monitored actively. So if a loan has a haircut of 30% then the bank knows that at all times it can pledge it to the central bank for 70 cents on the dollar. If banks’ current liabilities (deposits, mainly) never exceed the total amount of cash the central bank will be able to exchange for thus pledged assets, then the banks will never find themselves in a situation where they are short of cash.

This has many benefits: First, there can never be a successful run on a bank anymore. Second, all values are assessed when things are calm, not in the heat of a crisis. Third, things never run wild.

Sadly, the horse has bolted the barn on this third front. Banks today have many many more assets than central banks could reasonably expected to lend against, even with haircuts. So Mervyn King proposes that we move to his new model slowly, over a 20 year period, say.

Even with this fix in place, however, his assessment is that we are not even beginning to scratch the surface. Finance was the thermometer of the crisis. It’s where the imbalances came in evidence, not where they were caused.

The roots of the crisis, he believes, lie in the very engine of our society, our growth model.

Collectively, the governments of pretty much all countries in the world are happy to turn a blind eye to uneven growth if the alternative is no growth at all, and that is where the problem lies. This I describe above.

This framework also serves to explain why QE was necessary in this past crisis.

When the crisis hit and every single bank found its clients banging on its door for cash, there was a slow but steady way for the banks to shore up their cash balances, and they all ruthlessly pursued it. It was to refuse to extend credit to clients (including very healthy clients) who were unlucky enough to see their loan reach its maturity. So suppose a bank has 20 billion worth of loans it has given to its clients, of which 2 billion mature within the next year. Further suppose that half the clients with a maturing loan still need the credit. That's 1 billion of loans the bank will refuse to extend so it can shore up its cash balances.

This is, in other words, money that is being destroyed, never to come back. The private market once created this money and the private market is now destroying it. The central bank can do absolutely nothing about it. It cannot TELL the bank in question "these are excellent, creditworthy clients who clearly just demonstrated they can pay you back, why are you abandoning them in the middle of the storm?"

It is "inside" money that is being destroyed, the "private" kind of money that is more than 90% of the money supply, as discussed. The central banks had to step in. Through QE they bought good assets from the banking system. Against the proceeds from the sales, the banks were credited with balances in their account with the central bank, also known as "outside" money, or M0. In doing so, the central banks replenished, to the extent possible, the money that had gone missing from the system.

(I can be counted on to confuse "inside" and "outside," but the mnemonic aid is the fact that the private banking system is, inevitably, the point of reference: money made privately, "inside" the private banking system, is "inside" money)

Outside observers, who were used to time-honored relationships between "outside" money and inflation screamed bloody murder and started fantasizing about the wheel-barrows we'd all need to buy to carry around our inflation-plagued cash, but their fears were misplaced. The M0 that was issued on the back of QE was but a poor substitute for the "inside" money that had disappeared when the banking system unilaterally decided to stop extending credit in order to conserve cash.

An added benefit of the "pawnbroker" model, of course, is that it would act on this problem from both sides: not only would it have the cash at the ready, it would presumably also act as a natural brake in terms of fewer low-quality loans being given, so creditworthy companies do not get cash starved if they need to roll a loan in the middle of a crisis caused by lending to less creditworthy borrowers.

The key requirement of King’s proposal is that every bank must always be able to repay all its deposits that are less than 12 months in maturity (all current accounts – demand deposits – and short-term savings accounts).

If the Pawnbroker scheme were to be implemented, the first step would be for each bank to calculate how far they are away from meeting the “No Alchemy rule”: the requirement that ELA > ELL.

  1. The key regulatory requirement on banks (as well as on financial intermediaries) would be that Effective Liquid Assets must be greater than Effective Liquid Liabilities, or in shorthand, ELA > ELL.

As Lord King remarks, the alchemy is “the belief that money kept in banks can be taken out whenever depositors ask for it”

Lord King offers a novel alternative. Central banks would still act as lenders of last resort. But they would no longer be forced to lend against virtually any asset, since that very possibility must create moral hazard. Instead, they would agree the terms on which they would lend against assets in a crisis, including relevant haircuts, in advance. The size of these haircuts would be a “tax on alchemy”. They would be set at tough levels and could not be altered in a crisis. The central bank would have become a “pawnbroker for all seasons”.


LIBOR (or ICE LIBOR) is the world’s most widely-used benchmark for short-term interest rates.

The monetary system is designed to cater to the creation of the public’s money supply, primarily by private banks by establishing a money supply that is elastic. That is, it can expand and contract as the demand for money expands and contracts.

It’s important to understand that banks are not constrained by the government (outside the regulatory framework) in terms of how they create money.








  • Commercial and Industrial Loans, All Commercial Banks
  • Leading Economic Indicators and How to Use Them
    • Interest rates: when interest rates rise, you know that the economy will slow down soon
    • Durable goods purchase report:

Useful data resources:





汇率 =》 价格形成机制


Private Equity and Hedge Funding

  • How hedge and private equity funds are structured
  • Who their investors are
  • Pension funds and endowments. The model practiced by the $20 billion Yale Endowment and the $650 billion Norway Pension Fund
  • Fund investing strategies. Event-driven (including IPOs, splits and spinoffs), merger arbitrage, private equity type sidepockets, and more
  • Junk bonds, options, swaps, and other derivatives
  • Leveraged buyouts and other types of private equity investing
  • Venture capital funds and big changes affecting the venture capital industry


  1. DSGE模型(中文名字叫作动态随机一般均衡模型)
  2. 说这份工作就像是森林里的看火人,很多时候,我只是隔着玻璃窗在山顶看野火燃烧,时时记录和报告我观测到的数据,然而对于大部分野火,最好的办法是不干预这场火,不去以消防员的身份扑灭它,等它自己烧完。