|
| The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means | 
 enlarge | Author: George Soros
Publisher: PublicAffairs
Category: Book
List Price: $22.95
Buy New: $10.00
You Save: $12.95 (56%)
New (31) Used (12) from $9.61
Avg. Customer Rating:  38 reviews
Sales Rank: 553
Media: Hardcover
Number Of Items: 1
Pages: 208
Shipping Weight (lbs): 0.7
Dimensions (in): 7.7 x 5.2 x 0.8
ISBN: 1586486837
Dewey Decimal Number: 332.0973
EAN: 9781586486839
ASIN: 1586486837
Publication Date: May 5, 2008
Availability: Usually ships in 1-2 business days
Condition: Great condition, just arrived from publisher
|
| Customer Reviews:
 What "free-market"? April 29, 2008
15 out of 39 found this review helpful
Soros seems to think that if he yells "reflexivity" enough, it'll gain currency and him praise. Unfortunately for the billionaire and aspiring great-thinker, reflexivity is nothing new or novel.
Soros' seems to have a deep antipathy for free markets. But of course, he is not alone. Many economists and investors are quasi-socialists, including Stiglitz, Krugman and the great Buffet. It does make one wonder...
Truth be told, the U.S. doesn't practice free market capitalism, which Soros and others deride. The notion that we have a free market is a great myth in itself. We have a regulated market: some parts relatively free, some parts not free at all. Consequently, their criticisms are moot: they are railing against something that doesn't exist.
The regulation begins with the Central Bank system, which sets the price of money. From there to Congress and various gov't institutions that regulate commerce and business.
The ultimate cause behind our current financial debacle and every other monstrous "capitalist" debacle can be laid at the feet of gov't, regulation and gov't controlled fiat money. How? Gov't regulations subvert the free-market's natural inclination to investigate and self-protect against harm, deception and lies by the counterparty. Gov't regulations leads to the public trust in gov't and the businesses they are supposed to regulate, but ultimately fail to do. Gov't regulations give businesses the excuse to say, "we followed the law, don't blame us, blame the politicians."
To be sure, gov't has a role in capitalism: enforcement of contracts, self-defence, public infrastructure, and taking account of "economic externalities". That's pretty much it that comes to mind at the moment.
Bubbles really cannot form in a truly "free market economy". Bubbles are symptoms of gov't regulation and gov't controlled fiat money (too much of it that feeds the bubble).
Contrary to Soros' opinion, free markets do correct themselves -- but not very efficiently when gov't meddles in it.
 thought-provoking, even if flawed May 17, 2008
14 out of 15 found this review helpful
as an investor, free-thinker, and proponent of free society, i found deep value in this book. whether soros is right or wrong--i'm certainly not sold on all of his claims--the book stokes thought on the fundamental nature and function of markets, economics, and society.
what reader's will gain
* a clear, concise explanation of the scope and causes of the subprime crisis.
* an introduction to soros's philosophy and worldview. he addresses reflexivity, fallibility, human uncertainty, the boom-bust model, and the open society.
* a few financial predictions. soros is at times cagey, but there are just enough predictions on currencies, asset classes and countries to satisfy the investor. nevertheless, specific financial forecasts are not the focus of this book.
* insight into markets, economics, human behavior, society, and politics. for example: soros foregrounds the need for inhabitants of an open society to value and reward truth over demagoguery. this is the ethos of science. somewhat conversely, politics values power over truth. the book also contains an excellent example of reflexivity at work: one person stating to another "you are my enemy."
new paradigm repeats some material from the alchemy of finance. nevertheless, the concision of the book, plus the promise that it contains the author's best-yet exposition of his philosophy, make the repetition tolerable. i no longer feel any compulsion to finish alchemy, which i left in medias res to read new paradigm.
the book's flaws
some of the old, low-resolution diagrams from alchemy have found their way into new paradigm. these diagrams are difficult to read, especially in an e-book. i expected high-resolution, zoomable images. (by the way, there's a spelling error on p. 124, "sbome".)
soros is, at times, alternatively self-indulgent and self-nullifying. he occasionally reminds the reader that he is launching a philosophy career with his new book. he then proceeds to obliquely apologize for this self-indulgence. the book might have been better without such self-referential chatter. that said, it is somewhat comforting to see a self-nullifying billionaire who is willing to admit that he is "always wrong" and repeatedly corrects his perceptions to match reality (see his google talk).
readers will have to think carefully about reflexivity, human uncertainty and other elements of soros's philosophy. whether soros is right or wrong is secondary because, in your analysis of his work, you'll learn.
philosophical foibles
* soros builds reflexivity and the human uncertainty principle on the following foundations: strong epistemological skepticism (especially with regard to the possibility of knowledge about the future); a specific interpretation of the correspondence theory of truth; some of karl popper's conclusions. as a result, many of soros's arguments are susceptible to the same objections that can be raised against their foundations. (i won't get into those objections in this review. they are better tackled as problems of epistemology and philosophy.)
* soros waffles on market equilibrium. although he berates the efficient markets hypothesis, he nevertheless contends that markets are mean-reverting and easy to predict so long as they are not under the influence of reflexivity, which is relatively rare. soros then argues that, in reflexive situations, equilibrium becomes the exception rather than the rule. if reflexive situations are exceptional, doesn't that leave markets near equilibrium most of the time? in the long run, perhaps even boom-bust cycles are a form of self-regulation. the devastating effects of each bust engender a new generation of market cognoscenti. (soros himself may be living testimony to this idea. how much of his financial acumen derives from the nazi "bust" that marked his youth?) note that reflexive situations are the unruly ones that, in soros's eyes, necessitate market regulation. this brings us to the next point.
* why regulate? as soros himself admits--in alchemy, i believe--it is in reflexive situations that the greatest opportunity for profit lies. and yet these are precisely the unruly situations that he wishes to mitigate? that's an easy position for an already-made man. moreover, the human uncertainty principle seems to imply that more humans amounts to more uncertainty. so why should soros expect that adding human regulators to the market would tame its uncertainties? the solution is simple, but soros never produces it. i propose that regulators, if they are to act at all, should only work to limit the quantity of leverage available to market participants. regulators must never interfere in the direction of the market. or perhaps markets are best left completely unregulated. who or what can regulate with the efficiency of pain and euphoria?
* soros never explicitly addresses the relationship between size, reflexivity and human uncertainty. in physics, for instance, the uncertainty principle is significant at the quantum level, an infinitesimal scale. uncertainty has little bearing on macro events, such as dropping a 1kg rock from your hand. in somewhat inverted fashion, the broader market is scarcely influenced by the individual trader. since the typical trader cannot move the market, he can safely assume that his cognition of the market is independent from his participation. he can, in this particular instance, safely ignore reflexivity. on the flip side, and somewhat ironically, reflexivity emerges as a market-wide force once a critical number of market participants adopt the same bias. therefore reflexivity is applicable in some instances and not in others. those instances can be sorted along dimensions such as scale. to be fair, soros implicitly addresses some of the criticisms in this paragraph, but he would do better to treat them explicitly.
Soros's attempt at rewriting J M Keynes's General Theory(1936) May 28, 2008
11 out of 14 found this review helpful
Soros correctly shows that uncertain,indeterminate, changing expectations of the future ,based on incomplete,limited,and ambiguous knowledge and information,lead to multiple equilibria( and not a unique,single ,stationary ,stable equilibrium around which plus and minus standard deviations of prices cancel themselves out).However,this has already been done.It was done by J M Keynes in 1936 in his General Theory.Keynes's technical analysis was done in chapters 20 and 21 of the GT.Keynes analyzed the interaction and feedback effects of his expected aggregate demand(D) and supply(Z) curves in these chapters in his D-Z model.Unfortunately,no economist in the 20th or 21st century has been able to figure out what it was that Keynes did in these chapters.The main problem for economists is that they are unable to integrate the derivatives,either on pp.283-284 of the GT or in footnote 2 on pp.55-56 of the GT,in order to derive Keynes's Z function,which incorporated profit expectations based on his chapter 26 presentation in his A Treatise on Probability.Keynes's D function incorporates price expectations.The actual results are determined by the chapter 10 Y-multiplier model.Only in the very special case where the expected prices from the D-Z model are equal to the actual prices from the Y-multiplier model, which must then be equal to the optimal prices embedded in the boundary of the Production Possiblities Frontier curve(PPF),will the neoclassical result,under the assumption of perfect and complete knowledge or the assumption that all prices changes in all markets are normally distributed(an assumption rejected by Keynes and proven to be false by Benoit Mandelbrot for over 50 years) actually occur.Soros needs to at least read Keynes's statements on p.xi and pp.293-294 of the GT in order to realize that Keynes is dealing with shifting equilibia and not static,stable ,unique equilibriums.Soros will then realize why his very similar theory has been rejected by ,and will continue to be rejected by,the economics profession in the same way that Keynes's theory was rejected.Soros is correct that the demand and supply curves(agregate demand and aggregate supply curves) are not independent of each other This is due to the fact that "The shape of the supply and demand curves cannot be taken as independently given because both of them incorporate the participants' expectations about events that are shaped by their own expectations.Nowhere is the role of expectations more clearly visible than in financial markets.Buy and sell decisions are based on expectations about future prices'and future prices,in turn,are contigent on present buy and sell prices"(Soros,p. 55).This leads one to conclude that "...how can we act with any degree of confidence when we may be wrong and our actions may have unintended adverse consequences ?"(Soros,p.46).This ,of course,leads to the desire to hold money in order to engage in purely speculative ,short run activities that allow one to avoid the unintended adverse consequences of investing in fixed capital goods in the face of constant financial and technological change over time.This is the conclusion of Keynes's theory of liquidity preference.It REQUIRES that(a) expectations be uncertain and indeterminate over time and (b)incorporates questions about the degree of confidence one has in existing estimates,as well as the disposition of the decision maker(his optimism and/or pessimism,ie.his "animal spirits").
Soros summarizes in the following manner:"I assert that there is a two-way connection between thinking and reality,when it operates simultaneously,introducing an element of uncertainty into the participants' thinking and an element of indeterminacy into the course of events.I call this two way connection reflexivity,and I assert that reflexivity distinguishes unique,historical developments from humdrum,everyday events."( Soros,p.51).Keynes would agree completely.
Soros needs to carefully read the GT(chapters 5,12,19,20,21,and 22) and the A Treatise on Probability( TP;1921-chapters 3,5,6,15,17,20,22,26,29,and 33) in order to show what in his theory is different from Keynes's theory of decision making under conditions of risk,ignorance, and uncertainty(Ellsberg's ambiguity) based on interval estimates of probabilities that are indeterminate.It can then be judged to what degree Soros has improved upon Keynes's approach.
However,Soros should expect that he will receive NO consideration from ANY economist,especially any economist who has been trained to analyze all consumer,producer,and pricing behavior as if it could be modeled as some sort of Normal probability distribution.(joint,bivariate,multivariate,log).
 Rampaging Smart Guys June 11, 2008
10 out of 11 found this review helpful
I saw Mr. Soros testify before Washington State (home state of my favorite soccer goal keeper) Sen. Maria Cantwell's committee the other day (on TV, of course) concerning possible oil futures speculation. I was impressed with Senator Cantwell (although we'd agree on little, policy-wise) and with Mr. Soros (despite myself). So I picked up this book to see what he had to say on the central economic issue of the day.
I won't bash the book, exactly, but it was pretty rambling, pretty repetitive, and spent a considerably longer time trying to defend/explain his theory of "reflectivity" and bashing Republican politics than discussing the credit crisis. Still it offered some useful points and observations. It's personal account of worlwide historical financial events that Mr. Soros himself not only lived through but participated in as well as a concise account of the events that comprise the subprime mortgage meltdown were themselves worth, in my view, the price of admission.
In the end, though, the central theme of the book, it's overarching structure, is Mr. Soro's longstanding theorem about "reflectivity" in financial markets. He maintains that both the factual "reality" and the participants' resort to emotional facilities as a result of imperfect informational access interact with each other in a kind of feedback loop. As a result of this "reflectivity" serious degrees of uncertainty are injected into the marketplace that are not predicted by "classical" economic theories of "rationality" or "equilibrium". This, he says, invalidates market models based on those classic concepts. What to do about that, of course, he's not quite so clear about, except, perhaps, you should vote Democratic (his advice, not mine).
Unfortunately by his own analysis, this theorem is unsatisfactory as anything other than a cautionary alarm bell. By it's own definition and assertion it is untestable and (in the terms of one of Mr. Soros's own favorite philosophers, Karl Popper) incapable of falsification. Since it's prime tenent is that it's unpredictable and not even of consistent relevance in any given situation, it is roughly akin to the statement of Cretan philosopher, Epimenides, (quoted by Soros himself) that "all Cretans always lie". If, claiming unpredictablility, "reflectivity" yields accurate predictions, it is false.
Nassim Nicholas Taleb has called these same kind of events as said to be caused by "reflectivity" black swans. Inductive reasoning in financial markets has led to some frightening financial meltdowns. Having seen only white swans (even in their hundred thousands) and therefore betting the ranch there ARE only white ones is a sound foundation for disaster. Mr. Taleb helpfully also points out that somewhere downunder there are, in fact, black swans.
Benoit Mandelbrot has suggested that his fractile geometry, rather than bell curves, is a better financial model and, in fact, perhaps allows for better predictability. Don't know about that. The intersection between regulators and markets that Mr. Soros rather convincingly argues must be, at least in part, responsible for the subprime mortgage meltdown, doesn't strike me as a geometric intersection, fractile or otherwise. And besides, Herr Doktor Mandelbrot's math is WAY beyond my (or I'd postulate any other non genius math brain's) comprehension.
For me though, the persuasiveness of Mr. Soros's point about unpredictablity and odd shaped (non bell) curves can be found in the seminal work of William James, who demonstrated 100 years ago what every good salesman has always known (at least by instinct, if not overtly): that human beings ACT on feelings and use their intellectual reasoning to rationalize the result. I would accept, a priori, that no single individual actor in today's complex financial markets in our globally interwoven world can possibly know all the relevant facts about any one proposed action therein. Thus he must have imperfect information. And even as among the myriad of facts he does "know", he will use his experience, his intuition based on it and on the recounted experiences of those he has learned to trust, to value those various factual inputs.
I would submit (and I don't think Mr. Soros would raise too strenous an objection) that gernerally speaking, in a broad enough marketplace, all those individual "emotional" decisions ought to cancel each other out to a degree that would render them indistinguishable for practical purposes from randomness. Perhaps not perfect bell curves (some fat tails and modified kurtosis), but within acceptable (and perhaps hedgeable) limits.
But humans are also herd animals (we, however, call them tribes), and that instinct is a survival trait and still strong. One need only contemplate the blowing of a single car horn on a gridlocked highway that is inevitably followed in nanoseconds by hundreds more, to understand it's continued pervasive presence. When that happens in financial affairs, when smart guys get afraid of being left behind the "easy" money, when they can't stand the other tribe harvesting all that golden fleese or bear the thought of some young ambitious upstart taking over their hard won desk by merely following sombody else's playbook (what have you done for me lately says the boss), then homework vanishes. Smart guy follows smart guy in a kind of stampede. Risk of loss no longer matters or is outweighed by the risk of being stranded alone. Each of us (no I'm not a trader, but empathy demands the collective pronoun) falls all over ourselves to steal candy from the blind confectioner, never mind that we know that the poison pill is there in one of those jars on one of those shelves. It won't happen to me, we say. I'm too smart, I'll see it coming, I'll get away. This time it'll be different. We rationalize the emotional decision to chase after the leaders, to blow our horn, too.
This is far too long, let me try to wind up. In this crisis surely whole truckloads of the "smartest guys in the room" demonstrated levels of greed, arrogance, and impaired judgment that, despite being all too human (to borrow a phrase from Nietzsche, who seems particularly apt in this context) are still, in retrospect, shocking. Still, "free markets" provide efficiencies and multiplicities of choice that cannot be duplicated (or even approached) by any central planner or micromanaging regulator. But when these herd markets fail as spectacularly as they have here, the individualist free marketer along with the "reflectivist" (if I may be so bold as to lable Mr. Soros) are both left wanting a better way, a better regulatory system, for keeping these rampaging smart guys from trampling in their passing our own hard won little (in my case) or not so little (in Mr. Soros's) net eggs. This is a thoughtful book. Even just trying to "deconstruct" it may lead you down interesting thoughtways.
 Hits the nail squarely on the head May 28, 2008
8 out of 12 found this review helpful
There are three books that should be read in order to begin to understand where we stand financially in the world today. Second and third are Soros' present book and Morris''The Trillion Dollar Meltdown'. The first and most basic is the one that I reviewed last year: Eichengreen's 'Globalizing Capital' by Eichengreen, but which amazon refused to post (see, however, amazon.de).
Eichengreen presents the history of the Dollar from the gold standard until convertibility was cancelled in 1971, and from early deregulation years through 1995. Specific details of recent financial history under deregulation, which we can and should date from 1971, are also usefully provided in Lewis' `Liars Poker' and Dunbar's `Inventing Money'. We can date the use of the Dollar as international default reserve currency since 1945, while the inflation of the worldwide credit bubble dates exactly from 1971 when the Dollar wa cut loose from gold, was 'deregulated'. Soros summarizes the necessary background history in highly capsulized but interesting form, and focus on the onset of deregulation to the present era of worldwide financial instability.
Soros covers the Reagan era of easy credit and big spending, and the systematic deletion of financial rules that had been set up under FDR as a result of the depression. Eichengreen correctly presents the Great Depression as a liquidity crisis that could have been avoided, we've had no depression since that time because central banks have provided adequate liquidity in financial crises. This money creation trick will not likely work now any longer now that shadow banking is the primary source of Dollars in the world. Soros' book tells the same story of the crimes committed in the name of market fundamentalism' (laissez faire) since 1971, but with some different emphasis and also with even more useful numbers provided for the readers' orientation than does Morris. He states, e.g., that CDSs (collateralized debt swaps), a synthetic option invented in Europe in the early 1990s, amounts to about $43 trillion, which is over three times M3. M3 includes all 'Dollars' (credit, etc) in the world that can be found on balance sheets, so 'shadow banking' now dominates everything. In stark contrast, U.S. household wealth is about the same number, the capitalization of the U.S. stock market is $18 trillion, and the U.S. treasuries market is about $5 trillion. Again, compare the numbers with M3 and you'll understand why the oil price in Dollars has exploded, and is still exploding.
The U.S. is now in a worse position financially than in the 19th century before printing money by commercial banks was outlawed. The U.S. can only hope to regain control of the Dollar if derivatives are regulated and shadow banking is outlawed, otherwise expect the oil price to continue to rise in the flood of dollars in the world.
Shadow banking, combined with the U.S. trade deficit, is the real reason that the Dollar is weak. The high price of oil in Dollars reflects not only the new demand for oil in Asia, epecially China, but moreseo because too many Dollars in the form of credit are circulating in the world. Under free trade rules, the U.S. trade deficit has exploded due to loss of manufacturing capacity to Asia, and is recycled back to Washington to finance the budget deficit (U.S. taxes are far too low) to the tune of half a trillion Dollars in interest paid largely to Beijing and Tokyo each year. It's quite clear that the U.S. taxpayer has not yet contributed to the cost of the Iraq war, that war is largely financed by loans from Beijing and Tokyo in recycled Dollars. Soros did not mention this directly, but he should have. Low taxes combined with deregulation are the reason for the fall of America to its present severely weakened state.
Soros is not less critical of deregulation and the prevailing belief in "market equilibrium" than is Morris, George began criticizing those ideas in his first book published in 1994. Included in his new book is the autobiography of both his early years and his life as a trader, this makes for very interesting reading! A quote from his son is hilarious. In an earlier interview, the son was asked by a reporter what he thought of his father's theory (of reflexivity). The son replied that he knew as a kid that it's at least half B.S., his father trades when his back hurts!
George Soros has a twenty year history warning against the prevailing belief in 'market fundamentalism' and the effects of extreme deregulation. Because of excessive Dollar creation under those illusions, the chickens have come home to roost, it's George's day now. I would only hope that the Democratic presidential candidate in the U.S. would have enough understanding and insight to appoint him, or someone with understanding of the instability of unregulated financial markets and unregulated free trade, as his top economic advisor.
Shadow banking, due to the totally unregulated derivatives market, amounts to at least three times M3. We face either depression (unlikely) or a Dollar plunging even deeper (likely) because more Dollars must be `printed' as credit to avoid a worldwide financial collapse worse (as Soros points out) than that of the Great Depression. Soros' idea of reflexitivity is qualitatively correct, the financial system is not inherently stable, it's inherently unstable. Free markets are not a stable self-regulating dynamical system! It can only be stabilized by adding regulations like those of the 1930s. Because of the inventiveness with which 'rocket sciences' can invent derivatives to avoid regulations, derivatives creation and trading must be strongly limited. Either that, or continue as we are now (consider $20/gallon of gasoline, and higher). Both Soros and Morris point out that Alan Greenspan, an ideological follower of the free market extremism of Ayn Rand ('Atlas Shrugged', 'The Fountainhead') absolutely refused to consider regulating derivatives and preventing the mortgage bubble.
|
|
|
Powered by Associate-O-Matic
| |
