For the past 25 years or so the financial authorities and institutions they regulate have been guided by market fundamentalism: the belief that markets tend towards equilibrium and that deviations from it occur in a random manner. All the innovations – risk management, trading techniques, the alphabet soup of derivatives and synthetic financial instruments – were based on that belief. The innovations remained unregulated because authorities believe markets are self-correcting.
Regulators ought to have known better because it was their intervention that prevented the financial system from unravelling on several occasions. Their success has reinforced the misconception that markets are self-correcting. That in turn allowed a bubble of excessive credit to develop, which extended through the entire financial system. When the subprime mortgage crisis erupted it revealed all the weak points. Authorities, caught unawares, responded to each new disruption only after it occurred. They lacked the ability to foresee them because they were in the thrall of the market fundamentalist fallacy. They need a new paradigm
Thursday, April 03, 2008
Soros on the financial crisis
George Soros lashes out at market fundamentalism:
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I am sure there will be other shoes that will drop and yes there is a lot to be said for transparency. Mr. Soros was brilliant in using the instruments of the market (as they are now, perhaps he is still doing so very well) but somehow does not like what the market is doing now or will do in the future. The market's experiments in crazy instruments and outrageous lending practices are being cleansed as we speak (SIV's are being moved back into the balance sheets). News that UBS has to take a loss of several billion dollars actually moved the market up - since it indicated an acceptance of losses instead creative/possibly fraudulent accounting practices.
I do not doubt that there are shady operators out there and more may emerge and there may yet be more shocks to the system. Mr. Soros seems to be conveniently forgetting that it is precisely because markets work the way Adam Smith talked about that he was able to accumulate what he has and fund what he wants to fund and do what he wants to do.
There does need to be careful analysis of what the markets are doing and if there is fraudulent activity (under present laws). I am confident that if left alone, with adult supervision, the markets will correct appropriately and there is no need to keep yelling that the sky is falling.
The real danger to the US (and world economy) is the drum beat now in Washington about how President Bush is acting like Herbert Hoover - seems like the Democrats are very desirous of bringing on the next great depression. There is talk of protectionist legislation ("get out of NAFTA", "Time out on Trade" - all sound very much like Smoot Hawley Tarriffs that Hoover signed on).
I'd be very interested in looking at how Mr. Soros' is working the market as it is now - perhaps we can all learn some useful lessons on how to take advantage of a volatile market.
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