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The new paradigm for financial markets : the credit crisis of 2008 and what it means

by George Soros

  Print book  |  1st ed

2 of 2 people found this review helpful.
The new paradigm for financial markets    (2008-11-19)


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by SJHage

Book Review submitted by: Stephen J. Hage,

Books about economics and finance, for most people, are as appealing as having a root canal done without anesthesia.  This is not one of those books.  The subtitle: The Credit Crisis of 2008 And What it Means succinctly explains what the book is about. And, surprisingly, it's in small format and has only 162 pages including acknowledgements.

It's impossible today to turn on the news without hearing something about the credit crisis and there's no shortage of individuals willing to tell anyone who'll listen what caused it and who's responsible.  The problem is, there are lots of conflicting opinions and it's, at best, difficult to determine who actually knows.

To be sure, almost everyone has been touched in some way by the credit crisis and its impact will ripple through the global economy for years.  In attempting to understand it, I believe it's important to choose carefully among those willing to offer an explanation.

I chose George Soros because: The Quantum Fund he co founded with Jim Rogers in 1970 returned 42.6% per year for 10 years and, in 2007 returned almost 32% netting Soros $2.9 billion. 

Soros is a spectacularly successful hedge fund manager with an estimated current net worth of around $9 billion and ranked by Forbes as the 99th richest person in the world.  Additionally he's an economist and philosopher.  Nothing succeeds like success. Yowza!

There's nothing dry or tweedy about what he has to say.  Soros disagrees with economists who believe economics is or ever can be a scientific pursuit like physics, chemistry or mathematics.  And even though there are courses in mathematical economics and entire industries devoted to it Soros believes the "Quants" are wrong.  The central theme of his conceptual framework is, economics is a social science.  If you really want to understand it, you must focus on what people do and why.

The prime driver of economic dynamics is not money, or mathematics, or science, or technology it is rather what he calls Reflexivity which, more than anything else, is driven by human nature.

Current economic theory holds that markets naturally tend toward equilibrium.  Soros believes that conviction is not only wrong but one of the central reasons we find ourselves in such dire economic straits.  On the housing bubble he offers this:

"Taken on its own the United States housing bubble faithfully followed the course prescribed for it by my boom-bust model.  There was a prevailing trend-ever more aggressive relaxation of lending standards and expansion of loan-to-value ratios-and it was supported by a prevailing misconception that the value of the collateral was not affected by the willingness to lend.  That is the most common misconception that has fueled bubbles in the past, particularly in the real estate area.  What is amazing is that the lesson has still not been learned." (Italics mine)

Soros credits Karl Popper with the underpinnings of his economic philosophy and his argument is clean and satisfying from a philosophical perspective.

I am not an economist but I'm certainly interested in gaining some understanding of what happened to our economy, how we got to where we are, and what we ought to do about it. 

Lots of people think they know.  Unfortunately many of those same people are the ones who brought us to where we are.

When it comes to gaining deep understanding of what our economy does, how it does it and why, I'm inclined to pay attention to someone who, by manipulating it to his advantage, is the 99th richest person in the world.  I think anyone else interested in the economy should have the same inclination. YOWZA!

I strongly recommend you read this book.

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