Soros: Financial Crisis Severe

Monday, April 7, 2008 9:23 AM

By: Monisha Bansal

Discussing his new book, "The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means," liberal billionaire philanthropist George Soros argued that the current financial crisis is "the most severe since the 1930s."

Soros' book was released Friday. During a conference call with reporters, Soros blamed the current financial situation on a "false paradigm."

"The global financial system, as it is currently functioning, has been built on a false paradigm," he said. "The false paradigm is that financial markets tend toward equilibrium, and deviations from that equilibrium are random. Therefore, markets are self-correcting, and this has led directly to regulators abandoning the role they ought to play - which is to prevent excesses from going too far."

Houman Shadab, a senior research fellow in the regulatory studies program at the Mercatus Center at George Mason University, however, said Soros is "incorrect to interpret recent events in the financial markets as resulting from a misplaced faith in markets. A more accurate interpretation is that federal authorities fail to adequately appreciate the self-regulatory mechanisms of market activities."

"The credit bubble underlying current financial woes did not stem from innovation in financial instruments, but primarily from the Federal Reserve intervening into credit markets to lower interest rates in response to the recession following the dot com crash," he told Cybercast News Service.

"The failure of financial institutions, such as banks, to appropriately manage the risks from subprime mortgage-backed derivatives is in part attributable to federal regulation and oversight creating a false sense of security among market participants," Shadab said.

"By contrast, market discipline has successfully mitigated these same risks in the relatively unregulated hedge fund industry, which has thrived in comparison during the credit crisis," he noted.

Soros argues in his book that the new paradigm should be "reflexivity," which he explained as understanding that "people act on the basis of imperfect understanding, which introduces an element of uncertainty."

He added that currently there are "two bubbles currently at play. You have the housing bubble and the super bubble, which has been developing for the last 25 years. It started basically in 1980 when Ronald Reagan became president in the U.S. and Margaret Thatcher became prime minister in England."

Soros said the "super bubble" has led to the increased use of credit, which has been growing too fast.

William Niskanen, chairman of the libertarian Cato Institute, acknowledged that the financial system might be at its worst point since the Great Depression.

But he told Cybercast News Service, "I think that the effects of it on the general economy would be much less than the 1930s. The commercial banks for example, their deposits are insured so you don't have people fleeing. Also, I think the Fed has a better understanding of appropriate policies than before 1933."

Niskanen added that markets "do tend toward an equilibrium, but the question is whether the equilibrium is at very low prices or very high prices. I don't tend to share Soros' view that all of these problems are a consequence of market fundamentalism, or an unwillingness to consider changes."

http://www.newsmax.com/insidecover/Soro ... 86004.html

What Soros didnt say is that Bush started the housing bubble when he called for more housing acess to loans in 2002 and the Big Banks / Hedge funds have been having a field day with fraud ever since