The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means Reviews
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The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Meansx$9.80

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In the midst of the most serious financial upheaval since the Great Depression, legendary financier George Soros explores the origins of the crisis and its implications for the future. Soros, whose breadth of experience in financial markets is unrivaled, places the current crisis in the context of decades of study of how individuals and institutions handle the boom and bust cycles that now dominate global economic activity. “This is the worst financial crisis since the 1930s,” writes Soros in characterizing the scale of financial distress spreading across Wall Street and other financial centers around the world. In a concise essay that combines practical insight with philosophical depth, Soros makes an invaluable contribution to our understanding of the great credit crisis and its implications for our nation and the world.



Customer Reviews

  • Yet another reflexivity theory promotion


    By A1KBJ11P9Y22DZ on 2008-04-04
    I had bought this book based on a magazine article which indicated that the authors was giving his opinion on what is to be expected in the coming year.

    Who wouldn't pay a few dollars to know what a highly successful billionaire (and philantropist) trader thinks of a situation that has perplexed all economists and instilled fear in anybody who wasn't vacationing in the space station in the last year?

    I quickly bought and jumped straight to chapter 7: "My outlook for 2008".

    In that chapter, the author only describes a few short-term trades done in the first 3 months of 2008 that more or less went nowhere. For most of us, these are of little interest especially that most of them are hedge-fund style and involving shorting stocks, an activity likely to lead to the quick bankruptcy of most people (and including, in the past, a few well known high-flying traders, numerous hedge funds, and even two nobel-prize winners demonstrating to the world the practical monetary value of the actual theory for which they had won their nobel-price!)

    Well maybe I'll get more in the "Conclusion" chapter...
    Ah ah! There it is (p 158), I found it! :
    "Near panic conditions prevail in financial markets. People want to know what lies ahead."
    Yes, that's me! I want to know what lies ahead! ... That surely will be worth $10...! Y...e....s....!!!

    Now, here it is revealed to the world (Skip it if you don't want the punch line before reading the book):

    "I cannot tell them because I don't know" (p.159) !

    That's it!

    And that's the penultimate page and the actual conclusion.

    So what is the point of the book?
    "What I want to tell them (the readers) is something different. I want to explain the human condition."
    ... with a title like "A new paradigm of the financial markets" released in a hurry in the middle of the crisis! Yah sure...

    Of course that is not true. The book is yet another attempt to describe his "reflexivity" theory (fully explained in previous books). The author only use the current crisis as a bait and switch teaser.

    And if you haven't read his previous books and don't know anything about that theory (and would like to know about it) I can tell you all there is to know virtually in a single paragraph:

    The author claims that economic classical theory is wrong because the classic demand/supply curve are considered as a given pre-existant independant entity while in reality the economic actors by their actions influence those curve and therefore those curve are not independant. Hence the term "reflexivity" to describe that reaction.
    A typical example is that if you have 2 company A and B with identical balance sheet and prospects and people believe (without "evidence") that company A will do better than company B and bid its share much higher, then A far from being overvalued, by the mere fact of the bidding up of its shares, is more likely to succeed as it will be able to raise more and cheaper money than B, and therefore the fact that the company is now more apt to succeed merits its higher price vs the other, a sort of virtuous cycle, a case of "reflexivity". The author actually does give similar example such as conglomerates and a few others.

    Well, while this observation is important, this is hardly a new concept. That is the whole idea of stock promotion and the like. Anybody in the market knows the game very well.

    And the same concept is well known in a lot of other field under different names: it is the "self-fulfilling prophecy" convenient to explain the paranoid self-inducted reinforcing view of the world in psychology, it is the "bio-feedback" mechanism in biology, it is the "chain reaction" in physics, it is the "recursion" programming paradigm, etc... All variation of the same underlying idea.

    It is a very important principle, and congratulation to Soros to put it in the limelight again. But should the title be more truthfully... be something like: "Reflexivity - The Important Economic Principle Too Often Ignored"

    The author does nevertheless write an excellent chapter on the genesis of the current "super-bubble". It will be nothing new to anyone who has read any newspaper, magazine or the internet on the subject in the last year. However, the author believes this bubble marks the end of a more important decades-old credit "superbuble" and therefore is more ominous.

    There is also a chapter on "policy recommendation". After accusing the Bush administration of being afflicted with "market fundamentalism" and the Fed of mismanagement ("The Federal Reserve has the legal authority to regulate the mortgage industry, which it failed to exercice" p 119) he supports the measures proposed by Representative Barney Frank: modifying the bankruptcy law to permit the bankruptcy judge to rewrite loan terms on a principle residence and empowering the Federal Housing Administration to provide guarantees that would help refinance subprime borrowers into affordable mortgages and do everything to avoid foreclosures.

    Now the summum of irony is that Soros's proposal of rewriting the term of the mortgage and preventing foreclosure is a flabbergasting case of a real life case of "reflexivity" at work that Soros appears to completely have failed to spot!

    Indeed! Let's figure it together. Citizen A and B are in the same middle-class situation with similar job, asset and income. Citizen A purchase a million dollar home and a few year later refinance it to pay for a brand-new jaguar car. Citizen B continues to rent and avoid debt.

    Normal "classical economy theory": citizen A is wrecklees, citizen B is more prudent and ultimately will be more successful and rich. How wrong!

    In a "reflexivity economy theory": citizen A is obviously much smarter and responsible because his behavior will "act" on the situation and therefore change the terms of the deal! Sooner than later he will become a "victim" about to loose his home, quickly becoming sought-after video material to a heart-breaking newsreport on a pathetic epidemic situation about to convulse America! So economic philosopher Soros and populist represensatives band together with their great ideas: change the deal, erase the debt (in part or completely), and in any case let the poor fellow drive home from his tv interview in his comfortable jaguar and have a needed restful sleep in his million-dollar home. Of course the government won't stop there. The Feds will allso lowers interest, debase the currency and the congress will increase tax to pay for it.

    Now Citizen A is obviously the huge winner. He gets "relief" with lower interest on his loan, he is ecstatic about the dollar debasement and the resulting inflation (which continues to increase the value of his home relative to his loan). He keeps his home. He keeps his car. Life is good!

    Meanwhile the stone-age "neo-classical" citizen B is now in a dire situation: his income has been reduced further by new taxes at the same time as his dollar assets has lost 30%-50% of their value relative to virtually all other currencies, fuel, home or any hard assets; his money market fund now provides him an even higher NEGATIVE after-inflation and after-rax interest rate (lowered nominal interest rate MINUS highered inflation MINUS highered tax= outrageously negative real after-tax interest rate) and therefore he is every year getting poorer and poorer. He is receiving little sympathy and certainly no TV appointment to talk about his situation. After all he is the "lucky" who is debt-free! He obviously must lose any dream to ever buy a home since they are now worth 50%-100% higher than when citizen A purchased them (and will remain at ridiculously inflated level relative to median income rate if Soros gets his way). And while his interest t-bill income has collapsed (thanks to Bernanke) and while his net salary was reduced by his increased income tax (soon to come...) his rent is already shooting up due to the increaing inflation.

    You can also apply reflexivity to the situation of the meager salary of CEO in a prudent and sound bank (if there still exist one, perhaps somewhere in a small town in Alaska, who hasn't yet disappeard in the new "reflexive" economy) and the $200 million bonus of a CEO of a "victim" hyper-leveraged bank rescued by the government

    Of course reflexivity can work both ways and in the end citizen B could become the big winner given appropriate measures to reverse the momentum. Soros does recognise that reflexivity can go in both direction and even overshoot. Unfortunalety Soros didn't seem to realise that the measures he is championing (ironically by the actual effect of "reflexivity"!), would ultimately reward irresponsibility and severely sanction virtuous citizen.

    More troublesome is Soros's silences. Nowhere does Soros propose nor even consider the possibility that, in such dire times, it might make sense that a law would retro-actively (or at least starting today) force immoral CEO to disgorge the proceed of their theft.... euh , I mean, their huge bonus given to them for bankrupting their companies. (However Soros do suggest to implement IN THE FUTURE some (vague) regulation of the mortgage (and derivatives) industry).

    So in essence Soros measures (or absence of measures) boils down to: for whoever already robbed the bank wether it be the mortgagee or the mortgagor or the CEO (or actually all of them since they were all acomplices) the government must step in and make sure they keep their spoil (wether it be their home or bonus). None of them should be forced to give anything back. And ALL of the cost should happily be beared by all the other taxpayers because it is apparently in their best interest to continue renting and paying for the home and the bonus of the others. Outrageous.

    End of reflexivity discussion. Let's now study a smarter proposal from Soros.

    Soros propose a clearing house or exchange for credit default swap that would enforce adequate margins requirement. But while this is a great idea for future contracts, what do you do with the existing contract which now, today, DON'T have that "adequate" margin? Do you really want to let the entire world know, all at once, what is the percentage of those contract that are worthless (creating in all certainty a panic that will lead almost certainly to the bankruptcy of many pension funds) or do you want to leave some fuzziness so that people can digest the news over a period of time (years or a least months as it is currently now done) and find ways to spread the pain over years?

    This is an especially crucial and important question when, as Soros points out, the actual value of those Credit Default Swap ($42 trillion) is equalt to the ENTIRE household wealth of the USA, and is 2.3 x times the capitalisation of the ENTIRE stock market in the Usa!

    I humbly proposed what I believe is a better variation, at least for the mortgage part (but it can be easily extended to commercial debt):
    - the current difficulty is that nobody knows the value of the products because they represent tranche of pooled mortgage and nobody knows what the value of each mortgage is, nevermind the value of the pooled one or the tranche.
    - we need a drastic dramatic measure because the situation is clearly dire and this permits revolutionary emergency measures
    - we should pass a law that all existing and future MORTGAGE and FINANCIAL INSTRUMENT based on mortgage will need to be registered in a new governement MORTAGE TITLE REGISTRATION AND CLEARING AGENCY with an independant status (to prevent political interference). That agency would have to value each existing mortgage. This could be done by various statistical method based on current price in neighborhood, size of home, obtaining information from institutions and property tax assesment, assessing the value of mortagee information emanating from specific institution based on previous experience with those institution, sampling, new interviews, obligation for each mortgagor and mortgagee to resubmit (on a regular basis) information on his financial situation (including obligation to notify when significant change occured, like losing a job or having a significant raise) with severe penalty (similar to false income tax declaration) if not truthful
    - you also require by law the registration of all mortage derivative instruments indicating for each which exact tranche of which exact mortgage it is linked to and who owns it
    - you put all the data in a computer. In a few minutes it will be able to deduct the value of each mortgage derivative because it will know what the instrument is structured (mandatory mortgage financial instrument registration) and what is the underlying value of the mortgages are (mandatory mortgage registration and actual agency valuation of each)
    - each institution must mandatory use the value emanating from that agency in their financial statement and each institution is also required to indicate the approximate market value of its mortgage financial instrument obtained as described below.
    - the agency creates a mortgage and mortgage financial instrument market to let anyone one in the world bid on any morgage financial instrument put on sale by anyone. The computer keeps track of the exact composition of each instrument and owners could automatically reslice and repackage them to sell only what they want (same thing for bidders proposal).This will permit bank in need to rapidly get rid of some mortgage to raise quick liquidity. Any owner of instrument could accept a bid of someone wanting part of his modified instrument and the registration agency computer would automatically change it
    - the mortgage payments could be collected by the agency, just like we now do with income tax and remitted immediately to the registered owner account.


    The huge advantage are
    - there will be no costly bailout by the taxapayer (undemocratically forced on them)
    - some imprudent bank will deservedly fail
    - some prudent bank and indiviuals who saved their money will be highly rewarded with good values,
    - other countries liquidity (sovereign funds, pensions funds, individuals, oil money) will be able to reliquidify the Usa therefore ...
    - the collapse of the dollar will possibly be averted,
    - a level playing field: this put an end to the "play favorite" where this bank or that bank "too big to fail" or "run by a good friend of ours or with who I work before or will give me a great job in the future", or "a friend that has contributed a lot to our party" gets deals that make a very few super-rich at the expense of taxpayer's money ... of course this always being presented altruisticly as 'having saved our citizen from the worse"
    - in the all we will all be better then before the crisis with a new evolutionary (if not revolutionary) easy and super-versatile way to issue and manage mortgage and create a world market out of it.

    I could easily see Google propose to make this happen in record time...


  • Hmmm...


    By ALV4TW6SWHDUF on 2008-04-05

    About the previous review, I find it interesting that you say the subprime issue is: "a situation that has perplexed all economists" and then you proceed to give your own solution at the end of what you wrote. Are you saying that you alone have the solution to something that has "perplexed all economists?" Sounds deserving of a Nobel in Economics if true...ahem. Not all economists are "perplexed" by the issue...they merely speak in technical terms so most people don't understand the gravity of what they are saying. They have known of this issue for a long time. In fact, Bernanke wrote a book on what he is about to do with interest rates. It is called "Inflation Targeting." He will seek to maintain a certain "core inflation rate." Note that *food* and *fuel* are NOT included in the "core rate." They are part of what he is calling "headline inflation." The FED will not react to changes in food and fuel (headline) inflation directly...only after they have affected the "core inflation rate." This lag in control will likely create oscillations in the system. Great for stock traders, but tough for the average person with a life. The FED will have tough times politically.

    Further, you say that it has "instilled fear in anybody who wasn't vacationing in the space station in the last year." Those in the know have understood the problems with these policies for a long time. If you have understood this for only a year, then you are quite late to the party and have forgotten that Soros fought hard during the last election for a change in policies. Buffett spoke out against derivatives long ago. Jim Rogers (co-founder of Quantum Fund with Soros) wrote about the commodities boom in 2004 in his book "Hot Commodities." Implicit in the view that commodities will boom is the view that there will be hyper-inflation, since everything is made of commodities and the hyper-inflated prices will be passed along or the companies will go out of business. Greenspan also alluded to hyper-inflation in his book.

    Well, I won't address all the fallacies in your argument, since they are myriad. I will simply let the salient ones I have addressed stand. (Um...By the way, "penultimate" means one less than "ultimate." It does not mean greater than ultimate. There is only one word for "ultimate"...and "ultimate" is it.)

    Anyway, Soros is an expert in this field and has been quite prescient on this topic for years. Following advice such as his (as well as that of Rodgers, Buffett, Graham, and other notables) has permitted me to position my portfolio defensively for these times. I started years ago (hence my knowledge of what was known more than a year ago.) I sold my home at the peak of housing and bought a home in an area that did not have the same unrealistic home inflation. The remaining cashed-out home equity was invested in other defensive things. My home value has not fallen nearly as much as it would have had I kept my other home, thanks to Mr. Soros' foresight. I look forward to what he has to say about the coming financial winds so I can plot my next step in capital preservation/expansion.

    Don't judge the book based on theoretical criticisms. Look at the reality of the track record of the man himself. Also, consider the fundamental fact that most "bubbles" occur because of over leveraging and greed. Years ago there was the LBO bust and today, we have a bust from over leveraged banks and improperly leveraged homeowners. I say "improperly" because the way those contracts were written practically assures a bust...prepayment penalties that are really refinance penalties, interest rates dependent on LIBOR (London Inter-Bank Offerring Rate) instead of US rates, etc.

    In short, if the FED can't use its tools to avoid the foreclosures, it will cause a depression in the housing market. In fact, the housing market is already in depression by definition. That is, interest rate changes cannot be used to avoid the harm...therefore, severe price deflation (i.e., "depression") and job losses result. Since 78% of the US economy is housing related (e.g., furniture sales, appliance sales, insurance, lawn care, carpeting, mortgage banking, etc.) the situation is clearly serious.

    Now...all of this has a deeper level. There is a larger case of over-leveraging that is starting to unwind right as you read this review: The National Debt. Yes, deficits *do* matter. They are obligated taxes...with interest. The payment of the trillion dollar national debt will be painful and require a type of tax that noone voted for: Inflation. Why? Well, how is one going to get people to vote for a tax to pay off the debt when they were already voting against the taxes they already had? The only solution is an involuntary, hidden tax: Inflation. Over time, Inflation makes debts look smaller and more managable. The hidden inflation tax is *already* here because of the current interest rate cuts and will grow to a size people haven't yet imagined. Buy gold, oil, or any other commodity. This will be about a ten year cycle, overall, so inflation has a long time to run.

    Since inflation has already started, it will be difficult to stop. Like a fire, it will continue to burn until susceptible assets are destroyed. The remaining assets will be helped by it though.

    Buffett warned of this years ago. He recently said that more and more deficit spending and rate cuts would eventually make the dollar "worthless" (a statement he later "corrected" under some pressure to "worth less".) Anyway, the situation is serious. Don't trust any particular review of the book...not even this one. Look at the book yourself and make your OWN judgement regarding Soros' acumen.




  • Short but interesting


    By A3EQQP0LD4Z375 on 2008-05-09
    In August 2006 the risk manager of the home equity division of one of the largest banks in the United States collected his staff together and told them that the portfolio they manage had begun to exhibit dramatic losses. All the other banking institutions were beginning to exhibit similar losses he said, but that policies to be put in place will mitigate these losses and therefore "not to worry." He resigned his position only six months later, and at the time the mortgage losses throughout the nation were accelerating dramatically, forcing layoffs, resignations, panic in the financial markets, and aggressive action from the Federal Reserve.

    Theories abound on why this turmoil is occurring, one of these being discussed in this book, which is written by one of most well-known financial speculators of all time. The tone of the book is general and philosophical, and the author refrains from indulging in mathematical considerations, but there are many concepts in the book that are interesting and merit further investigation. The author's intellectual honesty is refreshing, in that he admits the job he has taken on is a formidable one. Describing the workings of the financial markets is challenging, and has occupied the time of countless researchers and financial analysts.

    The author wants to get rid of the "market equilibrium" paradigm in traditional economics and replace it with one that he has called "reflexivity". This concept is similar to a few that have been discussed in recent months, one holding that investor analysis and modeling activities actually serve to change the markets, rather than just "mirror" them. The author's idea is that humans have both a cognitive function and a "manipulative" one when they approach the financial markets. This has the implication that social phenomena cannot be described or studied in the same way as natural phenomena. They are separate areas of study, he argues, and he attempts to justify their separation on the pages of this very short book.

    His analysis is interesting and provocative, and certainly worthy of attention, but to put it on a firm quantitative foundation would require a large amount of work. The theory of reflexivity is not the only proposal to be put forward that differs from the classical one. There have been many in recent years due to the increasing importance of financial engineering, the latter of which has been applied on a massive scale. But the author proposed this theory almost two decades ago, when derivatives trading and financial modeling were beginning to ramp up. He therefore foresaw the need for alternative points of view when dealing with financial instruments and market activities that cannot be captured by the classical paradigm.

    The book is part autobiographical and could probably be better appreciated if the reader was familiar with the author's earlier works. But anyone interested in making sense out of the current news reports will find an interesting read here, even though at times the author's political affiliation comes out a bit heavy-handed. In addition, his attitude about free markets and "laissez faire" is somewhat puzzling since a purely "laissez faire" economy has not been realized historically. Any arguments against its efficacy are therefore misplaced. Those who still believe in "laissez faire" may therefore object strongly to many of the author's assertions and his recommendations at the end of the book for fixing the current "credit crisis." Whatever your world view though it is perhaps fair to say that the increasing complexity of the financial markets demands new ideas and approaches.If anything a good understanding of financial dynamics is a matter of survival. The financial markets of the twenty-first century take no prisoners.

  • a powerful deconstruction of the tools of economics


    By AQ5VTL82VW14L on 2008-04-07
    A book review from my blog:

    George Soros has written a new book called The New Paradigm for Financial Markets:

    The Credit Crash of 2008 and What It Means. It is currently available as an E-Book, but
    will be published on paper in May, 2008. It is his best and most informative book in
    terms of information and content. It avoids the difficulties inherit in the Alchemy of
    Finance with regards to his obscure syntax- there is none of that. It avoids the political
    criticism that you find in his books on Globalization and the Open Society initiatives.

    The book is useful for finding blindspots inherent in the economic system. For traders,
    he is criticizing the nature of Credit Default Swaps in that there really is no absolute
    guarantee that someone will pay you in the event of a default. He argues this because
    the margins are so low that systematic risk and exogenous risks can culminate into a
    disaster situation. This is similar to the one we have been having, but worse. This is why
    Soros rushed out his book early before printing it, because he is sick with worry about
    the whole credit mess and suggests that it will be the worst economic event in his life
    (which is scary given that he is almost 80, and has survived World War II).

    A recent newspaper article in the Toronto Star on Sunday, April 13th noted that Soros
    funds had managed to return 32% in 2007. A very significant return. We understand he
    was short US stocks and US Financials and long emerging Markets. It doesnt sound like
    he used CDS to short subprime as he apparently was unfamiliar with their use before
    the Credit Crisis.


    Remember that Soros did, in 1998, write the Crisis of Global Capitalism, a critique of
    the Financial Markets, which if you acted on the suggestion and went ahead shorting
    the Markets would have caused almost 3 years of serious pain. What it led to was a
    break off between Stanley Druckenmiller and Soros in 2000.

    Beyond all this issue with the current financial situation, the deepest and most
    provocative argument by Soros is from his criticism of classical economics.
    A simple explanation is his criticism of supply and demand curves.

    Have you ever physically seen a supply or demand curve of copper, potash, rice, or RIM
    stock? It doesnt exist. Unfortunately, economists see this as a given, which it is not.
    The price of something in a stock or commodity is a picture of relationships, but it does
    not rely on a predetermined supply and demand curve.
    Soros takes this particular argument very far. It is worth paying attention to, because he
    uses it to explain further exactly what reflexivity is (Reflexivity is Soros theory about
    how humans can affect the outcome of things). Soros has always been somewhat vague
    about reflexivity, but it is clear as day in this new book. For that reason, you should read
    the book. Soros new book is probably going to be one of the top investment books of
    2008.

  • Economics shouldn't be political


    By A46ODCG6UQNDG on 2008-05-06
    First, Soros is a very savvy financial genius. I'm always amazed when people try to take shots at him. It's like saying Bill Gates doesn't understand technology. When Soros talks, listen. If you don't understand, listen some more.

    Reflexivity is Soros's pet theory. He outlined it in the Alchemy of Finance. Basically the idea is that events can become self reinforcing. How does that relate to the mortgage collapse?

    The mortgage bubble and collapse was just like any other. Banks and other institutions noticed that lending money was profitable when the economy was expanding. All the loans seemed to be turning out well. The banks were printing money and decided to loan more and more. As more credit became available, the economy continued to perform strongly (the easy availability of money spurs on the economy) causing existing loans to perform even better. Banks were enticed to lend even more. All the while, institutions of all stripes continued to pile on leverage as their investments blossomed. Eventually someone decided to take their chips off the table. All of a sudden, credit came into question. Institutions started to de-lever, worried that they wouldn't be able to get their money off the table fast enough. No one would extend more credit. Money became scarce. Loans defaulted. The housing market crashed.

    So, a long slow benevolent cycle followed by a sharp a nasty malevolent unwinding. Pretty common in the financial markets. Predicting where one starts and another ends, however, is very, very, very difficult (an inevitbly a lot of very smart, very experienced people will be very wrong).

    An additional problem with mortgages was just how perverse the incentives were. Mortgage originators were paid by volume, not quality. They were encouraged not to check credit and to come up with creative ways to write loans to anyone. Homeowners were getting a tremendous deal - basically a call on the housing market and / or free credit to buy stuff. Investment funds (they should have been smarter) were lured into participating by the continued good returns - remember, until the dam breaks, anyone taking in the higher interest payment (and bearing the greater risk) looks pretty smart. Even the government gets to play along by pushing originators to make high risk loans in the name of "fairness".

    A simple solution is just to mandate fixed rate loans, either 15 or 30 years, and a minimum down payment of 25%. Eliminate leverage and the problem is solved. Of course then the same politicians that call the banks who lost billions evil for taking advantage of the home owners (uh, how's that again??) will call the banks evil for cheating main street by not letting it use the same tools as wall street. Populist business bashing is always fun until businesses start to die off.

    Some other points were on target, i.e. the effect of a large debt / inflation. Bush gets blamed for a lot of things, but he was actually good for the economy short term. Lower taxes and higher spending => stronger economy. Unfortunately, he's been dangerously reckless long term. Lower taxes is good, but it needs to be accompianied by lower spending. Instead we get irresponsible budgeting, a foreign adventure in Iraq, squandered international good will, no attempt made to curb the entitlement programs (medicare, medicaid and social security) that will destroy our country. So waht happens? People start to lose confidence in the $ and exchange it for other things. Losing 50% against the Euro may seem bad but it's nothing compared to how the $ has fallen against oil, metals and grains. Want a stronger $? Cut taxes and spending. The economy and the $ will go through the roof.

    Soros leans a little to the left politically, but anything he writes is worth reading. If you feel the need, just add a little red and take a little blue away from the picture and you'll find some very valuable insights.

  • What "free-market"?
    By AI8F2RTJTHF82 on 2008-04-29
    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
    By A12ETTODXHWL0E on 2008-05-17
    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)
    By A1UI9T8WKJPZN5 on 2008-05-28
    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
    By A20NRXJ051VWYC on 2008-06-11
    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.

  • Missing the Obvious
    By A1TOXV79PBF5UA on 2008-05-29
    All the discussion about the "crash" by a billionaire of dubious motives...misses the obvious. The "crash" was created in the first 4 months of Bernanke's 14 year New Term as Head of the Fed. He raised rates 2 percentage points over these first 4 months of his term (Sept 2006 to Jan 2007). Then was boasting in January 2007 he would raise them yet again. Now keep in mind that millions of people were "SOLD" creative financing of all types since 2001 by the very banks that crashed. All of these creative loans revolved around Adjustable rates that would only benefit the banks when rates went up. Sounds like everyone got a little greedy to me. They got their payback. Unfortunately, it hurt the average home buyer, who bought in believing in the High prices created by the Lowered rates since 2001 by Greenspan would continue and they would be out in the cold without a home. Please note that homes in the Bay Area of CA went up from an average price of $250,000 in 2001 to $650,000 in 2006. Most thought that this price hike was due to increased demand. It was created by low rates of Greenspan. Please note that the government indexes stated inflation during this period was 2% when it was really 300%
    It is only too obvious. Benanke's group wanted to become part of the "Billionaire Club". It backfired on them; and all of us. The Adjustable rates which benefit the lenders only..backfired on the world.


  • Putting Limits on Leverage
    By A3H86VWLHHG96C on 2008-07-20
    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.


  • Hits the nail squarely on the head
    By A17E7K3MQ5KKR5 on 2008-05-28
    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.

  • Mostly Repetition
    By A2QJZKMFJRCI7D on 2008-05-15
    Most of what is written in this book is a repetition of "The Alchemy of Finance". The title is "the new paradigm for financial markets" but there is hardly any substantial discussion of this beyond the obvious. The reflexivity idea is pretty interesting and I think Mr. Soros should fund some scientists/engineers to put the idea on a more solid ground.


  • Quick Read
    By A35VXBK55PRE9H on 2008-05-23
    If you're looking for specifics on where to invest in 2008/2009, this isn't a book for you.

    Book is short. Reflexivity is a nice idea/theorie, but he never shows a mathematical example. He does mention that the market participants can reinforce a trend and so on, explaining that markets don't go to equilibrium. He fails to mention natural disasters, drought, or market manipulation as other real world reasons that economic models don't work.

    First half of the book gives you an idea of how he thinks, the past that has influenced his ideas, and good examples of the basis for the current credit crisis. There is a section on history of the markets, boom in 60s, stagflation 70s, reagan 80s, and so on...

    Second half of the book is the meat. (Take note of the charts, very timely, and more informative than anything you'll see on the news) Lots of info and a timeline on the spread of the crisis. The pearl in all this, is that the economy runs on credit, and with credit lending damaged, basically even if the crisis is averted, limited credit will hamstring the economy for the next 3-7 years. (he does not draw any comparissons to Japan, which was a combo corporate and consumer credit bubble with a similar but worse fate. Lack of credit and slow growth occured in Japan in the 10 years afterwards... read "The bubble economy" for more on that.)

    He busts on the current administration, lack of leadership etc. Well a real estate bubble and booming oil bubble while most other industries fall behind is nothing to be proud of... If he's right, and all we've done for the last eight years is create paper wealth and run a deficit, then we're going to pay for it over the next 8 years and it's gonna bite.

    One thing I don't buy in what he writes... He talks about a super bubble, and it being based on US finance, since Bretton woods agreement etc... Historically economies expand during periods where scientific discoveries can be applied to industry or our everyday lives. Booms created by autos, railroads, electricity, computing, plastics/chemicals... Then we hit a bust. The Feds job is to offset the busts and the govt basically spends on infrastructure during the busts to keep everything going. Now that inovation, with a huge economy, and a sound military, is what gives the dollar, our goods, dominance on the world stage, not some piece of paper signed 50 years ago.

    He is right in that the US is sucking in value right now, as wealth funds save the banks, and the Fed gives out credit to save the system. Basically anyone holding US Bonds overseas is taking a bath to keep our system going. I think it's this short term Dollar/Bank moves, that has him upset, but he's blaming Reagan for it... Eh... I think it's more a banking problem with the current administration turning a blind eye.

    Look at it this way. If it wasn't for the housing bubble... adding 4% to GDP or more each year... We'd still be stuck in recession since 2000... Bushes big problem is that it just popped on his watch. Now they're mailing checks worth 1% GDP just to keep us "Technically" out of a recession... Buying time until someone else comes into office and then it's "Their problem"... LOL

    No mention of the new financial markets in Dubai or oil trading there.

    Does mention the Gulf Arab states now reinvesting in their own countries and industries... Which is really happening.

    Say's he's bullish on China and India, that the china bubble is in there early stages... (I think it's late) and he looses money when their markets tank this year... At least he's honest and admits it.

    Definately worth buying (used) but skip the first half of the book. Flip to page 79 and start there. Read ALL of the rest of it.





  • Cliff Notes on Soros
    By A40H8OV831NRP on 2008-06-20
    This 208 page book might be thought of as Cliff Notes for his previous 367 page book, The Alchemy of Finance, and will appeal to the same audience. During the 21 years between the books, Soros has mellowed somewhat and now describes his extreme Popperian position as radical falsification. I think he fears being called a skeptic. We know what happened to Socrates.

    Soros continues to refine and advocate his philosophy of Reflexivity. For this book Soros acknowledges the editorial help from philosopher Colin McGinn. A career in academic philosophy begins with critical appraisal of prior work, followed by the creation of a new paradigm with a unique language and definitions. The philosophic basis for his market insights deserves its own book which might be called The Epistemological Roots of Reflexivity.

    Soros defines Reflexivity as a fuzzy connection between knowledge and reality, belief and action, individual action and group behavior. We perceive reality within a context of prior knowledge. Our knowledge leads to actions which influence reality and produce new knowledge which leads to new actions. In engineering this is called a feedback loop and when the feedback gain is positive it produces an unstable system. In financial markets a positive feedback loop produces increased volatility, a boom and a bust.

    Reflexivity is not unique to finance and appears in many walks of life including warfare and medicine. In warfare an officer makes decisions based on incomplete and perhaps false information, knowing that any action will change reality and demand new knowledge, decisions and actions. In medicine there is an unresolved problem of patient informed consent. The physician explains the diagnosis and treatment to the patient. The patient relates this new knowledge to his reality, hopes and fears, perhaps missing some important nuances and facts. The patient's imperfect knowledge impacts a series of choices as additional information and treatment are provided by the physician.

    Soros dislikes the concepts of market equilibrium and probably does not support the strong and the weak form of the Efficient Market Hypothesis. His world view is more like the recursive loops described by philosopher Douglas R. Hofstadter.

    Soros ends his book with an entry dated March 23, 2008. The financial markets continue to unravel. He admits that his Foundation portfolio has a slight year-to-date loss. Although he discusses oil, housing, currency, Europe and Asia, he omits other commodities and countries. Perhaps Soros has a unique problem with Reflexivity. Soros has such world fame that any prognostication will surely affect financial markets.


  • Intellectual Diarrhea
    By A1DW7SL8N3IEUS on 2008-06-11
    Mr. Soros' philosophical rumblings are unbearable. His understanding of economics does not go beyond economics 101, yet he pontificates about the shortcomings of economics and all other financial market theories.

    His own theory of reflexivity (what economists call endogeneity) does not provide any actionable insights and really is not a theory but intellectual diarrhea.

    His analysis of recent financial events is rather pedestrian.

    Do not buy this book.

  • Compelling, But Massive Fraud Is At Work Here As Well
    By A2KCQD1D8SMRG5 on 2008-06-30
    Soros, the master manipulator, takes the reader on a journey through market machinations that have landed us in our current predicament, himself no doubt a shrewd but willing participant in the wild ride. However, he fails to give sufficient weight to the outright fraud that has riddled the mortgage market over the last five years. Every single excess in the financial markets over the last 30 years can be traced to corruption, fraud and outright theft. Our current meltdown? Lies on the mortgage applications, lies on the financial statements, lies on the appraisals, lies and misrepresentations in the rating agencies, etc. etc.

  • The future is uncertain
    By AS1EGXKSY3W1P on 2008-07-27
    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.


  • dave
    By A1UTLHF7P9SU7Z on 2008-07-15
    3 stars because well written. Get inside the mind of the man who is attempting to destroy America. Or rather talk America into self destruction. A man who grew up under and understands propaganda. Founds and Funds the newest best propaganda organization in america (Moveon.org).

    This man states in this book that facts don't matter. It's only what people believe that matters. This is true right up until the tyrant seizes control of all power. It is true right up until the other speculators looses all their money. Soro's made his fortune in the futures markets.

    This is Mr. Soro's 'Mien Koff' ("My Struggle" referring to the book by Adolph Hitler; 'Mien Koff')

    I recommend this book because you should read the words and attempt to understand your enemies.

  • Don't look in this book for financial advice.
    By AXCRW53BA87YH on 2008-07-17
    The subtitle of this book, "The Credit Crisis Of 2008 And What It Means", is completely misleading unless you are satisfied with an answer that things are "changing". Beyond that, Mr. Soros doesn't have much to say. But don't take my word for this, just go to pages 158-159 in the Conclusion of his book where he states, as follows; "Near panic conditions prevail in financial markets. People want to know what lies ahead. I cannot tell them because I do not know. What I want to tell them is something different. I want to explain the human condition."
    The fact that Mr. Soros has made several billion dollars is probably more likely to disqualify, rather than qualify, him as an expert on the human condition. He certainly would not be my first choice as a philosophical consultant. Mr. Soros would be well advised that when he doesn't have something to say about making money, he probably shouldn't say anything at all.

  • Do not Bother
    By A3RWBNEYBBVELS on 2008-05-23
    Soros has lost touch with the markets, is just about all I can add to "Read and Think"`s excellent review.

  • Difficult Reading, but Worth It!
    By A22RY8N8CNDF3A on 2008-06-16
    The "bad news" about George Soros is that he wants to be known as a philosopher, and fills "The New Paradigm for Financial Markets" with arcane language in that pursuit. The "good news" is that the book is worth plowing through.

    Soros opens with "This is the worst crisis since the Great Depression," and goes on to explore its origins and implications. Soros sees the housing bubble as not merely another bubble bursting, but also the end of a "super-bubble" that has covered the last 25 years or so. This super-bubble is caused by a prevailing credit expansion, accompanied by the Fed bailing out investors one crisis after another (creating a moral hazard), along with an increasingly laissez-faire market environment. Globalization further encouraged the super-bubble as the U.S. (via IMF and World Bank positions) forced developing nations to adhere to cyclical policies while bending the rules for itself - thus creating a higher-yielding haven in the U.S. for investors in those nations. Reagan-era deficits also served as a source of credit expansion. Still another was the new financial instruments and greater use of leverage by banks and hedge funds.

    The housing bubble had its origins in the late 2000 bursting of the Internet bubble, followed by 9/11. The Federal funds rate went from 6.5% to 1% (7/03); for 31 consecutive months the base short-term rate was negative. The bubble was also fueled by new vehicles to keep positions off balance sheets and shift risks to eg. pension and mutual funds. Meanwhile, rising home values boosted asset values on banks' balance sheets, prompting them to loan more. Prices rose still further, etc., etc.

    Half of GDP growth in the first half of 2005 was housing related (includes indirect effect of spending cash from refinanced mortgages). Forty percent of homes purchased in 2005 were investments or 2nd homes. Since income growth during that period was anemic, loans required increasingly strained ingenuity to qualify those involved. Complex mortgage-protection deals reached $43 trillion (1.5% margin requirements), vs. a U.S. stock market capitalization of $18.5 trillion, U.S. treasuries only $4.5 trillion; obviously the "protection" was superficial at best. Collapse of the housing bubble is now leading to an increasingly unwillingness of other nations to continue holding dollars.

    Why the repetitive bubbles? Soros contends that financial markets are not perfect - in fact, they are usually wrong. The problems began in the '70s when defense conglomerates saw their earnings falling with the end of the Vietnam War, so they used their then still high-multiples to acquire other firms, creating the ILLUSION of sustainable earnings growth. Eventually the acquisitions required to sustain the growth were too large to pass even a limited perception of reality; at the same time, accounting shenanigans began coming to light, a recession loomed, and it all collapsed. Basically the same thing with REITs - accompanied by ever relaxation of lending and regulatory standards, and expansion of loan-to-value ratios, LTCM, international markets (Russian Ruble, Mexican Peso, etc.).

    Soros confuses his discourse with an extended discussion of "reflexivity" - a term he never well defines, though I sense he means the trend-following habits of speculators. Alternatively, the "bigger fool" theory is a much simpler and similar explanation, though not as inclusive.

    A brief review of Soros' investments over the years suggests he has made billions investing on the front-end of over-shooting bubbles, and shorting their similarly over-reacting down-sides.

    Where do we go from here? Soros believes that credit conditions have been relaxed so far it is difficult to see how they could continue as such. (However, he also admits being wrong in the past, and also sees printing more money as an option. The latter, however, is somewhat inhibited by existing popular outcries against rising oil prices and other commodities - especially food.) He also believes regulatory authorities need to prohibit financing mechanisms that are beyond basic comprehension. The 2008 market will go below 2007's low. About 40% of subprime loans and ARMs will default over the next 2+ years - housing prices will need to decline over 20% to clear the market, and government intervention is essential. Unfortunately, Soros does not comment on what would happen if Asian and Arab states stop holding dollars.

    What's Soros doing now? He's short on U.S. and European stocks, U.S. ten-year government bonds, and the dollar; long on Chinese, Indian and Gulf States stocks (even though he sees them as overvalued) and non-US currencies (China's in particular seems guaranteed to rise).

  • Good as always
    By A3B1F09Y2JPD on 2008-04-23
    If you read and liked the previous books he wrote - you will definitely find this one helpful!

  • Good for Some Light Reading
    By A3TTIK3TF5YQL on 2008-05-26
    This book was pretty short, so whether you end up liking it or not, it's not like you will have wasted much time in reading it.

    Basically, George Soros is just explaining his perception of the economy as a linear, historical process rather than a series of cycles. I think he is trying to say that history does not repeat itself. My explanation may not be the greatest, but that's what I got out of it...

    I think if you really want to know what is going to happen in the next year, don't expect too much from this particular book. On the other hand, if you are interested in gaining some perspective, understanding a different viewpoint, and maybe learning a few basics about the elements of finance and economics relevant to the credit crisis, it is a good book to read. It doesn't matter if you are a staunch Republican and can't stand George Soros' politics (I am most definitely not a Liberal, by the way). It will still provide some food for thought, and it would be a shame for political alignment to prevent any intelligent readers out there from reading a different point of view without getting upset.

    Conclusion: read it to learn and gain perspective, not for economic forecasting.

    I give 3 stars because it was pretty interesting, but not life-altering.

  • is this about the credit crunch? nah..
    By A3C8ILTEQB2VJ8 on 2008-06-01
    this book is not about the credit crunch and what it means...i think the publisher has to use that title to attract buyers....mr. soros just writes whatever that interests him. this book is about either himself or philosophy, not much about the credit crisis itself...it isn't really a finance book..i enjoy philosophy a lot, so it was okay for me. the title is indeed very misleading

  • Some interesting insights from a suspect individual
    By A23SRIOL8TKG68 on 2008-07-17
    I dislike George Soros. He takes billions out of the pockets of US and British tax payers and "repays" us with his hideous [...] propaganda and falsehoods. Compare this with John Templeton, who was a signficantly BETTER investor than Soros was, and put his money in underpriviledged parts of the world to help build them up. Templeton also used his money to create more value in the world through his humanitarian organization and Templeton Prize for worthy people like Mother Teresa.

    I learned new things from Soros' analysis of "where we are, how we got here and why this might be the end of a period of stability" and think that's worth the read. On the other hand, his prescriptions and remedies are highly suspect. As another review wrote, it's good that Soros wrote this down so we can better understand what lurks in the mind of this creepy guy. (I believe he's one of Obama's puppet masters, so it's important to learn as much as we can before the November elections).

    Investment books talk about how doctors and other professionals don't make good investors. I think the same can be said that good investors don't necessarily tranfer their skills into other areas. The Theory of Reflexivity may work for Soros, but it's a repackaging of LOTS of other people's work, only in a dumbed down, non-testable way. This book won't be getting Soros the respect that he apparently seeks from professional philosophers.

  • Geo-Political Investment-Banking Student
    By AZ0U89818WFYW on 2008-05-22
    Just excellent!!! Soros puts into updated context his original concepts on International Reflecivity and a clear/understandable narrative on the impact of it. A must have book.

  • enjoyable and intellectually stimulating
    By A3JI7TFQKT6F01 on 2008-05-27
    It is never redundant to re-visit the basics, as they are the foundation.

    This book is a great and succinct re- iteration of both theory of reflexivity and George Soros, the speculator.
    Very enjoyable and intellectually stimulating. Hard to argue with.


  • The New Prardigm for Financial Markets: The Credit Crash of 2008 and What It Means
    By A132LQA2HNPL3L on 2008-06-28
    I was surprised how poor a writer Mr. Soros is. He should have had someone ghost write it for him His concepts were not fully developed in an understandable way. The conclusion I came to is that his success comes more from his "back pains" than in definalble concepts.

  • Excellent insights
    By A3N5Z2TS1KZVWN on 2008-07-02
    George soros brings in an unbiased perspective of impact of current events in capital markets and shifting paradigms of dominance from US to other countries A must read for global citizens


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