Soros: Financial Crisis Stems from 'Super-Bubble'

[nerdgirl 0]

George Soros has a new book out The New Paradigm for Financial Markets; and, as a good capitalist, he’s taking advantage of opportunities to promote it.

Soros asserts that we are in an unparalleled financial: “It’s the worst, most serious crisis of our lifetime.”

(Quoting from the NPR interview) “Soros blames what he calls a ‘super-bubble’ that started about 25 years ago. That’s when a less-is-more philosophy became popular with economic regulators. That allowed Wall Street to invest increasing amounts of money in credit. Soros says there's a ‘super-bubble’ in the economy that’s bigger than just the recent housing crises, and he blames exotic financial instruments for helping cause it.”

He’s also challenging the belief in the collective ‘wisdom’ of the market. “The idea was that regulators always make mistakes, state interference in the markets just messes things up. And that was a false idea .... Regulators are human and bound to make mistakes, but markets are also human and they are also bound to make mistakes. Instead of markets always being right, they're actually always groping at trying to find out what the facts are. But they never get it right.”

[From his book:]

“We are in the midst of the worst financial crisis since the 1930s. In some ways it resembles other crises that have occurred in the last twenty-five years, but there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process; the current crisis is the culmination of a super-boom that has lasted for more than twenty-five years.

“To understand what is going on we need a new paradigm. The currently prevailing paradigm, namely that financial markets tend towards equilibrium, is both false and misleading; our current troubles can be largely attributed to the fact that the international financial system has been developed on the basis of that paradigm.”

He’s also concerned about the large amount of IOUs held by China, Japan, and oil-producing nations.

So what is Soros missing that Speakers Corner's collective wisdom sees?

VR/Marg

Act as if everything you do matters, while laughing at yourself for thinking anything you do matters.
Tibetan Buddhist saying

[kallend 2,150]

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So what is Soros missing that Speakers Corner's collective wisdom sees?

VR/Marg

That the financial markets are the modern version of coveting thy neighbor's house, ox and ass.

...

The only sure way to survive a canopy collision is not to have one.

[lawrocket 3]

Soros is, in my opinion, missing a few things. Note the large amount of puffery going on in this. "It's the worst, most serious crisis of our lifetime."

Actually, that can be argued for a couple of points. But I remember real estate being brutal in the late 1980's (remember the S&L crisis? This PALES to that in terms of lost savings, etc.) Remember the huge sums lost in the tech bubble? I do. What about the "misery index" and "stagflation" of the 1970's?

I think every decade has its "crisis."

Next: he is inferring new proposals that let the states regulate more. That's nice, but he points out that the paradigm of less regulation is international in nature. To me, that indicates that it is not a problem that can be solved by our regulators.

One thing Americans tend to do is look only at ourselves - as if this credit crunch is only here in the US. It's not - this is a worldwide thing.

As far as concern about international IOU's - I remember everyone being worried about Japan owning the US in the early 1980's. But Japan found a away to get balanced out there, too.

Thing have a way of working out. Soros is an iconoclast. Ironically, he made his money in hedge funds - new investment vehicles. So I don't doubt that he knows what he is talking about.

Nevertheless, he's got a product to sell, and sales on made on the basis of perceived need.

My wife is hotter than your wife.

[kelpdiver 2]

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Thing have a way of working out. Soros is an iconoclast. Ironically, he made his money in hedge funds - new investment vehicles. So I don't doubt that he knows what he is talking about.

Nevertheless, he's got a product to sell, and sales on made on the basis of perceived need.

Yes, his own self interest clouds the reliability of what he tells us. And I have a hard time separating him as a financial 'expert' from his political meddlings. Since his lifetime must include the 30s and 40s, I can't take his 'worst crisis ever' very seriously.

[idrankwhat 0]

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Yes, his own self interest clouds the reliability of what he tells us. And I have a hard time separating him as a financial 'expert' from his political meddlings. Since his lifetime must include the 30s and 40s, I can't take his 'worst crisis ever' very seriously.

From someone who knows how the game is played I think it's worth giving him a listen. With the games that are being played in the higher finance arena someone has to stop and ask if we're setting ourselves up for a big fall. The shenanigans of the bundling of the subprime loans into securities is but one example of how some types of financial "creativity" can cause some serious global problems.

I heard this today on the way in to work. I thought it relevant.

"Bob Moon: The International Energy Agency has cut its forecast for world oil demand. The IEA says record prices and slower growth in the U.S. and other places will keep demand lower than expected this year. The prices we've seen at $120 a barrel and above have energy companies forging more deals with reputedly corrupt governments in order to tap new reserves. We usually don't get the details of those deals. A bill going before Congress today could change that. From the Marketplace Sustainability Desk, Sam Eaton reports

Has financial innovation gone too far when even many PhD's can't seem to explain how things work? We've been putting that question to a few experts, Harvard University finance professor Josh Lerner among them. He thinks things crossed the line when Wall Street bankers came up with all-but-incomprehensible investment offerings.

Josh Lerner: Extremely complex hybrid securities piled on top of each other, where certainly their risk and return properties weren't well understood, and where it seems that they weren't solving any kind of fundamental economic problem by being set up. It was almost like it was innovation for the sake of innovation itself.

Or, he suggests, simply for the profit of the investment banks promoting those obscure investment offerings. As long as everyone was making money, there were few complaints. Lawmakers and regulators have kept their hands off for decades to encourage financial innovation. But, Lerner thinks regulators have to be inventive now, too.

Lerner: Just as there's a need for innovation in terms of the kinds of financial securities that are being offered, there is a need for innovation in terms of what kind of roles and what kind of information regulators have -- greater transparency in the system.

Michael Lewitt: Sounds good, but I think in many ways it's a cop-out. There are certain practices that are just unwise.

That's Michael Lewitt, president of Hegemony Capital Management. He argues transparency is worthless as long as executives are intent on using sleight of hand.

Lewitt: There was a lot of disclosure about what Enron was doing. There was only one problem: It was almost not understandable. Some of these things that they're doing are so complicated, you can be as transparent as you want and disclose it all you want, and most people are not going to understand it.

Lewitt says the only thing Wall Street bankers have made clear lately is that they can't be trusted to make things clear. And that leaves it up to regulators to draw very sharp lines about what's permitted and what's not. Democratic Congressman Barney Frank chairs the House Financial Services Committee. He's convinced new regulation is necessary to bring clarity to the financial markets.

Barney Frank: As we talk about these plans, I did have one person say to me, "Well, you know Congressman, some smart people don't agree with what you're proposing." My answer is, yes, no dumb people caused this problem. You had to be very smart to think up things that were exotic and as potentially damaging.

And then again, just maybe smart like a fox. As investment whiz Warren Buffett once observed about the confusing annual reports issued by some companies: "If I can't understand it, I know they don't want me to understand it."

http://marketplace.publicradio.org/display/web/2008/05/13/incomprehensible_securities/

[lawrocket 3]

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From someone who knows how the game is played I think it's worth giving him a listen. With the games that are being played in the higher finance arena someone has to stop and ask if we're setting ourselves up for a big fall. The shenanigans of the bundling of the subprime loans into securities is but one example of how some types of financial "creativity" can cause some serious global problems.

Well, this is the sort of stuff that was opened up by legislation. Gramm-Leach-Bliley did PLENTY with this. Previously, much of these investment vehicles were not allowed.

When doors are opened to try new things, often people fail. And they learn their lessons and move on.

This was an expensive lesson.

My wife is hotter than your wife.

[kallend 2,150]

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Josh Lerner: Extremely complex hybrid securities piled on top of each other, where certainly their risk and return properties weren't well understood, and where it seems that they weren't solving any kind of fundamental economic problem by being set up. It was almost like it was innovation for the sake of innovation itself.

Or, he suggests, simply for the profit of the investment banks promoting those obscure investment offerings. As long as everyone was making money, there were few complaints.

As I previously wrote, the financial markets are the modern version of coveting thy neighbor's house, ox and ass.

...

The only sure way to survive a canopy collision is not to have one.

[Muenkel 0]

I don't think Mr. Soros has anything to worry about. President Obama (Our first half-white president) has promised 'change'...unless of course if he made his fortune on ox and ass.

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Chris