The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means

The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means | George Soros | Absolutely mindbreaking!!

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The New Paradigm f...

	The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means George Soros PublicAffairs, 2008 - 208 pages average customer review:based on 60 reviews view larger image
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Required reading for our children and grand children

Our financial condition today is a mess. As George Soros explains we have been in a credit driven economy, out of control, completely inundated with new financial instruments, huge debts and obligations to our citizens as in Social Security and still adhering to the notion of a self correcting equilibrium economy. Time is running out
and we are adding to the problem by engaging in a disastrous war.

Absolutely mindbreaking!!

Soros goes where nobody has ever gone before, he actually proposes a new paradigm that contradicts actual economic theory common sense, which can be empirically proved on an everyday basis. This new paradigm, based on his theory of reflexivity, helped me understand better how markets tend to behave sometimes, and will surely help every reader in the same way. Definately recommended for everyone who is interested in the subject, from economic theory grad students, to hedge fund managers.

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The future is uncertain

For those who are not familiar with Soros's previous books, I would shortly summarise his main philosophical idea, which is updated in his new book. Mr Soros criticises the equilibrium theory (which contends that markets tend toward equilibrium, and therefore correct their own excesses; or, in other words, that prices, although they may take random walks, tend to revert to the mean). Equilibrium theory is the actual paradigm used by the economists to offer universally valid generalisations that can be used reversibly to provide determinate predictions and explanations similar to the theories of natural science. One of the examples being the supply and demand curve.

Mr Soros's theory, which was created by him 20 years ago and which he calls Theory of Reflexivity, contends that social events (and therefore financial markets) are fundamentally different from natural phenomena because their thinking participants, who have biased views and misconceptions, introduce an element of uncertainty into the course of events. For example, the demand and supply curves are not independent variables, but they are actually influenced by each other. Mr Soros believes that events in the financial markets are best interpreted as a form of history: the past is uniquely determined and the future is uncertain.
For those familiar with Quantum mechanics, this theory is similar with the Uncertainty principle which was developed by Heisenberg between 1925 and 1927 , which is often called more descriptively the "principle of indeterminacy." Like physicians who studied the Uncertainty principle at that time, economists are slow to accept Mr Soros's theory of reflexivity not only because of its abstract nature and lack of mathematical model, but also because of its lack of predictability. Most likely Mr Soros seminal work will determine the development of an alternative paradigm, like Schrodinger's wave mechanics, which will entail a (more familiar) mathematical model. The reason being simply that we, as humans, can not bear theories which increase uncertainty instead of reducing it.
In conclusion, an interesting book for those who can afford the `'luxury'' of reading a rather philosophical book, and a disappointment for those looking desperately for investment hints from the most famous financial speculator. But definitely a buy for both categories of readers, for the intellectual quality of its arguments and for explaining the history and the context of actual status of financial markets.

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superbubble worry, but it is heuristic

Soros' little book is a delightful read due to an exceptional sincerity and intellectual honesty. His youthful curiosity and seemingly consuming desire for philosophical debate is disarming and infectious but also a bit narcissistic, as student "bull sessions" tend to be. In fact, the two smiling photographs of him at the end of the book corroborate the aura of a person eager and happy for philosophical discourse and being entertained by and thoroughly enjoying a reciprocal and progressive discussion.

He admits trying to be a philosopher who worked out a new theory, reflexivity, that is to say humans engage in two functions: l. cognitive objective analysis and 2. manipulative and subjective actions designed to evoke change and personal benefits. The two functions interact, hence reflexivity.

Karl Popper was Soros' philosophical mentor at LSE, and Soros denies Popper's Unity of Method, i.e. the scientific method and the social scientific method are and should be the same. Soros denies this and rightly so. Though he mentions Hayek only once very briefly as being anti-communist, he seems unaware that Hayek had already exhaustively analyzed the need for an entirely different method for economic analysis and the social sciences. In fact, Hayek believes the attempt to mimic the method of the natural sciences in the social sciences, in particular in economics, has done substantial harm. Soros, who seems quite pre-occupied with outmatching Popper and limited to him, could have benefited from Hayek, Dilthey, Wittgenstein and many others who have already partially or fully worked through epistemologically what he is doing to Popper. But it's quite understandable that he wants to outmatch his professor. Lots of students have that impulse and lots of profs have experienced this pattern. It's proof that Soros retained a youthful disposition throughout his life.

Soros correctly denounces both the Enlightenment's objectivity and rationalism as well as the post-modern idiom which he ties to Bush and Karl Rove. Though being aware that ignorance determines far more than knowledge and rationality, he still believes that understanding reality should take precedence over manipulating it. For this was not done by Bush and cohorts, who hoodwinked the nation into the Iraq war, causing a precipitous decline in U.S. power and influence. Soros has it absolutely right here and shows the same honesty and objectivity he personally displayed when he characterizes his experience as a 14 year old Jewish youth in Budapest in '44 hiding under false identification as "exhilarating" and "high adventure," an admission that may cause some criticism.

Soros seems to overemphasize the impact ideas and philosophical notions have on politics. Politics is quite indifferent to ideas and philosophical analysis. Power and influence mediate and resolve issues in the political arena, not rational debate.

Too often, Soros assumes that having made what he calls "a killing" in the markets is proof of superior intellectual analysis relative to overall economic analysis outside the financial sector. This is a somewhat egotistical and a logical flaw, for too many who lost a fortune in the stock markets have, nevertheless, given brilliant and valid analyses of socio-economic events. His contrary-mindedness and, to be sure, many aspects of his theory of reflexivity, no doubt were crucial in making fortunes. But will he admit that this involves redistributing wealth from many smaller investors to the few and, thus, one can conclude that the heavy participation of tens of millions of Americans in the stock markets actually kept them from increasing the median family/individual net worth? It made them poorer than they would otherwise have been.

Criticizing both classical equilibrium analysis and the Rational Expectation School, Soros then ventures into a more detailed analysis of the background, causes and course of the current economic malaise. Credit expansion, the Japanese carrying trade, budget deficits, expanding leverage funds, etc. all interacted to create what he terms a "superbubble" of which the subprime mortgage fiasco is just a trigger. It all began with the recycling of the petrodollars in the late sixties and early seventies. He covers the banking crisis of the '80s, the international crisis of the '90s and, quite correctly, faults Greenspan for taking interest rates down to 1 percent between '01 to '04. In so doing, Greenspan caused the real estate bubble. It spread the risk, causing more risks to be assumed. Here Soros is at his best. He believes that risk in this period was passed on through newly fangled instruments and sophisticated formulae from those who knew it best to those who knew it far less. Regulators lost track of risk assessment and catastrophically abdicated their duties.

China will challenge the U.S. faster than is believed and thus, Soros asserts, again quite correctly, that the Project for a New American Century, which Bush and cohorts used extensively to guide policy, will prove to be highly ironic. Though he doesn't say so, he agrees with Kevin Phillips' conclusion that the financial industry was allowed to get too big. Finally, Soros affirms Barney Frank's solution for the subprime mess.

Unfortunately, Soros' analysis is limited to the financial markets and does not deal with lots of other factors that heavily determine and impinge on the U.S. economy. For that, the reader may want to consult my own assessment on why the U.S. needs an economic miracle by accessing "http://comparativegems.blogspot.com/" which provides an overall comparative historical evaluation of the U.S. economy which Soros does not deal with.

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