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The New Paradigm for Financial Markets: The Credit Crash of 2008 and What It Means | 
 enlarge | Author: George Soros
Publisher: PublicAffairs
Category: Book
List Price: $22.95
Buy New: $15.61
You Save: $7.34 (32%)
New (3) from $15.61
Avg. Customer Rating:  7 reviews
Sales Rank: 49
Media: Hardcover
Number Of Items: 1
Pages: 192
Shipping Weight (lbs): 0.7
Dimensions (in): 7.7 x 5.2 x 0.8
ISBN: 1586486837
Dewey Decimal Number: 332
EAN: 9781586486839
ASIN: 1586486837
Publication Date: May 19, 2008 (In 6 Days)
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Product Description
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.
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| Customer Reviews: Read 2 more reviews...
Short but interesting May 9, 2008
3 out of 3 found this review helpful
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.
Economics shouldn't be political May 6, 2008
5 out of 6 found this review helpful
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"? April 29, 2008
6 out of 16 found this review helpful
Soros seems to think that if he yells "reflexivity" enough, it'll gain currency and him praise. Unfortunately for the billionaire and aspiring great-thinker, reflexivity is nothing new or novel.
Soros' seems to have a deep antipathy for free markets. But of course, he is not alone. Many economists and investors are quasi-socialists, including Stiglitz, Krugman and the great Buffet. It does make one wonder...
Truth be told, the U.S. doesn't practice free market capitalism, which Soros and others deride. The notion that we have a free market is a great myth in itself. We have a regulated market: some parts relatively free, some parts not free at all. Consequently, their criticisms are moot: they are railing against something that doesn't exist.
The regulation begins with the Central Bank system, which sets the price of money. From there to Congress and various gov't institutions that regulate commerce and business.
The ultimate cause behind our current financial debacle and every other monstrous "capitalist" debacle can be laid at the feet of gov't, regulation and gov't controlled fiat money. How? Gov't regulations subvert the free-market's natural inclination to investigate and self-protect against harm, deception and lies by the counterparty. Gov't regulations leads to the public trust in gov't and the businesses they are supposed to regulate, but ultimately fail to do. Gov't regulations give businesses the excuse to say, "we followed the law, don't blame us, blame the politicians."
To be sure, gov't has a role in capitalism: enforcement of contracts, self-defence, public infrastructure, and taking account of "economic externalities". That's pretty much it that comes to mind at the moment.
Bubbles really cannot form in a truly "free market economy". Bubbles are symptoms of gov't regulation and gov't controlled fiat money (too much of it that feeds the bubble).
Contrary to Soros' opinion, free markets do correct themselves -- but not very efficiently when gov't meddles in it.
 Good as always April 23, 2008
2 out of 7 found this review helpful
If you read and liked the previous books he wrote - you will definitely find this one helpful!
a powerful deconstruction of the tools of economics April 7, 2008
20 out of 23 found this review helpful
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.
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