George Soros explains "The Crash of 2008" again
Friday, February 6, 2009 at 03:39PM
Skeptic in Economics, Sub-prime Mortgage Melt-down

George Soros lays out here his narrative of what caused the financial crisis, how it has been mismanaged (especially by not saving Lehman Bros.), and the toxic effects of credit default swaps and collateralized debt obligations. After reading the views of many economists, this is refreshingly practical. The nation and world would be well served if his analysis and advice were heeded at least as much as that of the economists. He says at the end of his piece that he "will next outline the policies that in my opinion the Obama administration ought to pursue, and then assess how the future may play out," but I haven't found that part yet.

To understand the linked article, it is helpful to know that Soros strongly disagrees with the core assumptions of most mainstream economists that prices, in the financial world as well as elsewhere, tend toward equilibrium and that one can safely ignore brief price excursions away from equilibrium. Soros, who has been very active (and very successful) trading in financial markets for decades, says that prices often do not tend toward equilibrium but are inclined to self-reinforcing extremes on the upside and the downside. In his theory of "reflexivity" he says these irrational price swings can affect the actual value of the thing being priced--as for example in a bear run when a bank's rapidly declining stock price may cause loss of confidence in its survival, leading to a real and objective weakening in its ability to operate profitably.

Article originally appeared on realitybase (http://www.realitybase.org/).
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