Delving into the alchemy of the modern banking system, Mervyn King reveals how financial institutions have evolved into a complex web of risky practices and questionable stability. He explains how banks are able to create money out of thin air, by lending out more funds than they hold as deposits, a process known as fractional reserve banking. This magical transformation of liabilities into assets has fueled economic growth, but at the cost of exposing the system to potential crises.

King highlights the inherent flaw in this model, as it relies on trust and confidence among banks, depositors, and borrowers. When that trust is shaken, as it was during the 2008 financial crisis, banks can become vulnerable to runs, leading to widespread panic and economic collapse. He recounts the history of banking crises, from the South Sea Bubble to the Great Depression, demonstrating that this alchemy has been a recurring theme throughout history.

To illustrate the perils of the modern banking system, King shares anecdotes about the fall of Lehman Brothers and Northern Rock, two institutions that succumbed to the dangers of excessive leverage and reliance on short-term funding. He argues that these cases were not isolated incidents, but rather symptomatic of a broader problem within the financial industry.

The author also draws on insights from prominent economists, such as Hyman Minsky and Charles Kindleberger, who have long warned about the instability of the banking system. Their theories, once dismissed as overly pessimistic, have gained renewed relevance in light of recent financial turmoil.

By shining a light on the alchemy at the heart of the banking system, this key idea encourages us to question the foundations of our monetary order and consider whether it is truly sustainable in the long run. Ultimately, King suggests that a new approach to banking is needed, one that prioritizes stability and resilience over short-term profits and growth.