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 | The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means
Author: George Soros
Publisher: PublicAffairs
Binding: Hardcover
Released: 2008-05-05
Sales Rank: 324
ISBN: 1586486837
Edition:
Cover
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 2008-08-05 - 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.
 2008-07-28 - disapointing
Written in poor English, very confusing book. I read Finance and Economics books every week and this one was the worst ever. Almost fell asleep on every page,
 2008-07-27 - 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.
2008-07-25 - 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.
2008-07-20 - Putting Limits on Leverage
George Soros thinks that the current credit crunch is the most severe financial crisis since the 1930s and that it marks the end of an era of credit expansion based on the dollar. In this book he argues that a new paradigm is urgently needed to better understand what is going on. The paradigm used until now by most economists was based on false premises.
The existing paradigm, often referred to as free-market fundamentalism, holds that markets are self-correcting, that they naturally tend toward equilibrium. Economists as far back as Adam Smith have argued against regulation or government intervention of any kind since it would interfere with the natural forces of the market.
Soros correctly argues the contrary. In fact government intervention has repeatedly saved the market. A few examples are the bankruptcy of Continental Illinois in 1984, or the failure of Long Term Capital Management in 1998, or the current bolstering of Fannie Mae and Freddie Mac (my example). The notion that the market deviates from an orderly path is the rule rather than the exception.
The new paradigm that is needed, according to Soros, must incorporate the theory of reflexity. Developed in previous works by himself and his mentor Karl Popper, reflexivity examines the relationship between thinking and reality, between the cognitive function and the manipulative function. In the investment world, this means that when investors are bullish on, say, housing or mortgage backed securities their values go up, not because they become intrinsically more valuable, but because everyone else is thinking they are more valuable. This is basically old-fashioned market psychology dressed-up in theory. The mechanism that allows the market to go up is self-reinforcing but ultimately self-defeating. The market goes from euphoria to despair overshooting the top, and ultimately the bottom too. Witness today's housing market.
We are currently experiencing the consequences of unregulated credit markets and Soros argues that if more is not done the crisis could get much worse. He points out that moneterist doctrine in inadequate. Controlling the money supply is only half of the picture. The internet bubble, the housing bubble, and the current commodities bubble were created through excessive use of leverage. The amount of debt currently outstanding is unprecedented. Any new financial regulations will need to temper the use of credit to avoid future bubbles.
Soros argues that the US must come to grips with the new realities if it is to maintain its preeminent position in the world. If we are not careful the dollar will lose its standing as the reserve currency of choice. The task of regulating credit will now became even more precarious since the credit market is already tightening. Soros, as a former hedge fund manager, realizes that credit is the lifeblood of capitalism and any overregulation will also damage the economy. Reflexivity theory aside, this book is an excellent discussion of the challenges we are facing today.
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