"Alchemists of Loss"

Amazon webpage                                                                 Book forum Cato Institute, November 2011


Endorsements and reviewers’ comments


Bracing, sharp, bleakly amusing and profoundly depressing, Alchemists of Loss is a fascinating, smart, often contrarian analysis of how the financial system got into the mess into which it now finds itself – and why none of us are likely to emerge in one piece.”

 --Andrew Stuttaford, Contributing editor, National Review Online


“Dowd and Hutchinson rip the jugular of Keynesian economics.”

--Jim Forbes, Forbes on Tech


“Unlike many financial prospectuses that preceded the Panic of 2008 and most of the discourse that has followed, the Alchemists of Loss is not filled with contradictory statements, double-talk and non sequiturs.  Dowd and Hutchinson present a clear, comprehensive and compelling diagnosis in which all of the culprits are hung out to dry.  The authors then lay out a detailed blueprint for replacing what they finger as crony capitalism with Free-Market Capitalism.”

--- Professor Steve H. Hanke, The Johns Hopkins University


“This book is must reading for anyone who wants to understand the true origins of the financial crisis and the reforms needed to create financial harmony.”

 --Dr. James A. Dorn, Cato Institute, Washington, D.C


"Many books have purported to examine the causes of the financial crash of 2008, but they really just provide commentary on the mistakes that were made. Authors have often concluded that we just need to make sure that governments stop markets making the same mistakes again - an approach that is doomed to failure. This book gets to the root causes of the crash [and] more government is not the solution.

-- Professor Philip Booth, Institute of Economic Affairs


“What if the 2007-2008 financial crisis was but the last byproduct of the "Keynesian episode"? Alchemists of Loss draws lessons from the economic crises of the past, to envisage a way out of the current financial mess. This book is a must read for anyone who cares for the future of the world economy.”

-- Dr. Alberto Mingardi, Director General, Istituto Bruno Leoni, Milan


“This book is a page turner. It is a must for anybody who has an interest in what has gone wrong with our financial system and thus the economy, and what can be done to fix the problems created.

   It is an unparalleled tour de force of the last 300 years of modern finance with special focus on the last 30 years and microscopic focus on the last 30 months. In years to come this will be a book that our children and our grandchildren refer to when studying “The Great Crash” of the last years of the last decade. Sensible lesson are learnt from the Japanese 20 year recession rather than the 30’s. The various stimulus packages and failed deficit spending should be there in your face for anyone with above room temperature IQ to learn what not to do, but hey ho — every generation, like monkeys, we seem to have to re learn everything in economics all over again.

  The alchemists in the title are 7 Nobel Prize winners, investment bankers, the political class, other economists, and regulators.  They exploit the frailty of the human condition — our impulse to believe that “this time, things are different.”

    Dowd and Hutchinson show beyond all reasonable doubt how the financial centre of the economy has become one massive rent extraction machine where gains are privatised and the losses are socialised — paid by the likes of you and I, the hapless taxpayer. The bailouts are unquestionably the biggest examples of this. No other industry on the whole planet would get this treatment. Smaller examples of rent seeking are the successes of the industry in achieving light touch regulation and non-domiciled tax status for over 100,000 UK financial service workers. Indeed, unbeknown to most, the UK is one of the biggest tax havens in the world.

    I hope the compelling policy recommendations will be taken up and the book itself will be a major historical book that will last the test of time, and be read by generations to come.

--Toby Baxendale, Founder of the Cobden Centre


“Dowd and Hutchinson put the latest crisis in the context of history. They point out that government intervention and misguided regulations were culprits in all financial meltdowns. Austrians may have a few bones to pick with the authors on a couple minor points, but all in all, the strength of the book is its free-market view of the current crisis that shines a bright light on the rampant belief in dubious notions like Modern Financial Theory that include the efficient-market hypothesis and Modigliani-Miller theorem. 

     Dowd and Hutchinson write that it is government meddling that creates the environment for financial crisis. Deposit insurance and other consumer protection schemes like Securities and Exchange Commission regulation make the average Joe and Jane believe that the government will make them whole no matter what happens. The authors also believe the destigmatization of bankruptcy has caused Americans to overborrow, lowering savings rates along with ethical standards.

     Booms and busts, crises and crashes will continue ad infinitum, and the authors believe eventually this will lead to declines in the real economy as well as the financial-services sector. As Austrian theory dictates, malinvestments must be liquidated in the bust, and that includes financial-sector jobs, leaving New York with ghost buildings in the financial district and empty luxury condo towers. For the city of London, Hutchinson and Dowd see the future as being even worse.

    Mr. Dowd has written plenty about free banking, and he'd like to fix all of this not with 2,300 pages of additional regulation, but "with a commodity standard, free banking (no central bank) and financial laissez-faire, restrictions on the use of the 'limited liability' corporate form, and the most limited government." The authors seek a "new Age of Economic Reason," abandoning "the philosopher's stone of universal government meddling sought by that sublime Paracelsus of economic alchemy — John Maynard Keynes."

    Unfortunately, the Keynesians in the Obama White House likely aren't asking for Messrs. Dowd and Hutchinson's phone numbers: their program is to stimulate, regulate, and keep the zero rate.

      Never mind that this hasn't worked any other time and won't this time either

--Doug French, President, Mises Institute


Alchemists of Loss sets a high standard. It is a devastating critique of what it contemptuously calls Modern Finance, with its toxic mix of quantitative science and perverse incentives, of meddling but incompetent governments, and gullible customers.

   The authors – an academic and a former investment banker – seek to demolish the tenets that supported the astonishing growth of the finance industry. They show how Modern Portfolio Theory, the Efficient Market Hypothesis, Black-Scholes and the rest provided a sense of certainty about markets that bore little relation to how the world really worked. They are scathing about the financial innovations that allowed unscrupulous investment bankers grossly to misprice complex products and fob them off on to greedy investors.

  Their central point is that the finance industry has managed to transform a highly privileged position, with all its mysteries, bells and whistles, into “a vast rent-extraction machine”.

   No one really is spared: grasping managements, feeble risk managers, ignorant politicians, misguided central bankers, useless regulators. John Maynard Keynes comes in for a special blasting because of the encouragement he gave to governments to interfere. The only person who emerges with any credit is Paul Volcker, for the courage of his tough money policies. …

    This is a tremendously stimulating read, and strong fuel for the reform debate.

-- David Lascelles, Co-Director, CSFI


“… a very comprehensive and fairly detailed, and surprisingly entertaining, account of the historical context, theoretical framework, and actual events of the crisis …

    Despite some small flaws, including … its generally depressing bearishness about the future, Alchemists of Loss should take its place as one of the more comprehensive and well-informed books on the financial crisis and its suggestions for reform merit serious consideration in the policy arena.

--Professor Steve Horwitz, St. Lawrence University in the Cato Journal


“In this book, Dowd and Hutchinson walk us through 300 years of financial history, pointing out along the way what's wrong with modern finance and modern economic policy making.

    They debunk the belief that financial risks are predictable and that financial innovation makes markets more stable. Modern quantitative risk management, they say, is "no more than an arcane cult that has helped to disguise risk-taking on a huge scale while pretending to do the opposite."

--Mirilen Cawad in “The Street”


“In their extraordinarily lucid and—to my way of thinking—authoritative recent book, “Alchemists of Loss—How Modern Finance and Government Intervention Crashed the Financial System”(Wiley 2010), Kevin Dowd and Martin Hutchinson make the point that  (read: financial institutions’ “risk management” systems), have been root causes of global economic booms and busts, and a structural decline in advanced country productivity and living standards, particularly since the mid-1990s.

    Dowd and Hutchinson make the vitally important point—inexplicably rarely heard nowadays —that central bank engineered negative real interest rates, maintained over more than a few months—seemingly the default option in Greenspan/Bernanke playbook—always and everywhere lead to disaster in the longer term, while being grossly unjust and distortive in the short term.”

-- Stephen Harner, Forbes


“Eminently educative read for the finance-avid.”

--D. Hurali, The Hindu



Review by Steve Baker MP on the Cobden Centre website, Feb 15, 2010:http://www.cobdencentre.org/2010/02/alchemists-of-loss

 “Books on ‘Fixing’ Wall Street.” Short review by M. Cawad in “The Street”, June 19, 2010: http://www.thestreet.com/story/10781630/3/summer-reading-books-on-fixing-wall-street.html

“Alchemists of Loss”. Review by Toby Baxendale, Founder of the Cobden Centre, June 24, 2010:http://www.cobdencentre.org/2010/06/alchemists-of-loss-review/

“Further reflections on Alchemists of Loss” by Toby Baxendale, June 28, 2010: http://www.cobdencentre.org/2010/06/further-reflections-on-alchemists-of-loss/

“Alchemists of Loss”, Financial World, D. Lascelles in Financial World, July 7, 2010: https://www.financialworld.co.uk/Archive/2010/2010_07July/Reviews/David%20Lascelles/18958.cfm

“They lose, we lose, they win” by Investment Rarities, July 16, 2010: http://silverandgoldcoinblog.com/2010/07/16/they-lose-we-lose-they-win

“Turning bread into stone.” Review by Doug French, President of the von Mises Institute, on the website of the von Mises Institute, July 26, 2010-09-30: http://mises.org/daily/4592

“ALChemists of Loss- Quantifying the reaction Ingredients of Recent Economic Disasters” by Jim Forbes, ForbesOnTech, Aug 16, 2010: http://forbesontech.typepad.com/my_weblog/2010/08/alchemists-of-loss-quantifying-the-reaction-ingredients-of-recent-economic-disasters.html

 “Undone by unsound assumptions.” D. Murali, The Hindu, September 6, 2010: http://www.thehindu.com/arts/books/article617336.ece and http://www.blonnet.com/iw/2010/09/05/stories/2010090550881100.htm

“Book review: Recovering from 2008.” M. Sieff, The Washington Times, October 11, 2010: http://www.washingtontimes.com/news/2010/oct/11/recovering-from-2008/

“Satyajit Das’s blog: Fear and loathing in financial products: pleasant and unpleasant ‘truths’.” S. Das: http://www.wilmott.com/blogs/satyajitdas/index.cfm/2010/10/11/Pleasant--Unpleasant-Truths

Other media comments:

Stephen Harner, Forbes, September 10, 2011, Modern Central Banking and the BOJ: http://www.forbes.com/sites/stephenharner/2011/09/10/modern-central-banking-and-the-boj/

Brian Micklethwaite, June 30, 2010: http://www.brianmicklethwait.com/index.php/weblog/comments/at_the_launch_of_alchemists_of_loss/

Brian Micklethwaite, Samizdata quote of the day, July 2, 2010: http://www.samizdata.net/blog/archives/2010/07/samizdata_quote_664.html

Edward Chancellor, FT, Aug 1, 2010: http://www.ft.com/cms/s/0/df507c34-9c01-11df-a7a4-00144feab49a.html

HBS Alumni Bulletin, September 2010: http://www.alumni.hbs.edu/bulletin/2010/september/ib_books.html

Steve Baker MP, Sept 29 2010: http://conservativehome.blogs.com/centreright/2010/09/confused-comrades.html

Cheetan Parikh, Sept 30, 2010: http://www.go2cio.com/articles/index.php?id=3502.

Media interviews with the authors:

Marc Sidwell’s interview with Kevin Dowd, “Risking the City: the economist who sees no future in political meddling.” City AM, March 8, 2011.

William Patalon III’s interview with Martin Hutchinson, “Talking with the author of Alchemists of Loss.” Seeking Alpha, October 23, 2010.