George Soros explains the financial crisis

If you're going to read only one article about what caused the financial crisis and what to do about it, read this one by George Soros. Since the article is itself a condensation of his recent book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means, I hesitate to condense it further. Well, OK, here are a couple salient points.

While the real estate bubble and subprime mortgages were the triggering event, the whole financial system had generated a "super bubble." It had become far too leveraged, had too many risky and opaque instruments like credit default swaps, and was based on fundamentally unsound perceptions about how financial markets work. One can say the system is self-correcting and "worked" only if one ignores the fact that periodic government bailouts had become an indispensible part of the system; it was the bailouts, not the markets, that kept the system going through crises.

For the future, Soros proposes, inter alia, regulatory tools from the 1960s, variable margin requirements, minimum capital requirements, and loan portfolio limits, plus regulation of financial engineering and registration of new financial products. He predicts that when all the carnage is cleaned up the financial sector will be—and should be—a much smaller part of the economy.

The link to the article is active now, but when it goes into archives, you may not be able to access it without a subscription. Go there now and email it to yourself for reading when you have time.

Comments

[Rob Stuart]

More of George Soros writings and interviews can be found at http://www.georgesoros.com

[christine]

Remember, the US was going to be the great "service" economy! It is thrilling to think that the financial services industry will be a smaller part of the economy. We might end up with a "real" economy with some industry and manufacturing again. And, it is especially important that it be efficient manufacturing, not the farce that our auto industry is now. Survival of the fittest dictates that the suits in the financial industry should try to get blue collar jobs now.