November 22, 2008
The Crisis & What to Do About It
George Soros in the New York Review of Books:
The salient feature of the current financial crisis is that it was not caused by some external shock like OPEC raising the price of oil or a particular country or financial institution defaulting. The crisis was generated by the financial system itself. This fact—that the defect was inherent in the system —contradicts the prevailing theory, which holds that financial markets tend toward equilibrium and that deviations from the equilibrium either occur in a random manner or are caused by some sudden external event to which markets have difficulty adjusting. The severity and amplitude of the crisis provides convincing evidence that there is something fundamentally wrong with this prevailing theory and with the approach to market regulation that has gone with it. To understand what has happened, and what should be done to avoid such a catastrophic crisis in the future, will require a new way of thinking about how markets work.
More here.
Posted by Abbas Raza at 11:33 AM | Permalink
Comments
As I've understood it so far, in the '90's there was a huge increase in investment in instruments of the financial market which far outstripped investment in actual businesses. Investors became greedy because the growing bubble allowed for much higher returns than traditional forms of investment. I've also read that there was a great increase in the amount of money to be invested because of the growth of wealth among the already-affluent; I have no idea if that could be realistically considered a major factor in the change of investment patterns, and would be interested to hear what others with more expertise than I think about this last argument. But more to the point, it seems that for whatever reasons, investment money started going in much greater proportion into the financial markets instead of actual factories and businesses producing something or providing a tangible service. As I see it, this has had a very negative effect on at least some aspects of our economy; investors started demanding higher rates of return (such as they could get from inflated financial instruments) from businesses such as, for example, newspapers, thereby contributing to many newspapers being forced to cut corners so much that their quality declined, and some have closed their doors. I wonder as well if some businesses have had difficulties raising the cash they needed to grow because they could not offer such high rates of return. If there's any validity to such a view, would it not then make sense to monitor the health of the market in part by attending to the ratio of different types of investment and taking steps to encourage more investment in "real" businesses? If so, how could that be done?
Posted by: Donna H. | Nov 23, 2008 5:04:54 AM
I don't wonder that the "misconception," as Soros calls it, is in reality a deliberate illusion--at what point did people begin to accept that any financial instruments could exist without risk? At its base, the financial industry is all about speculation--always a gamble. What I think we're seeing is a purposeful manipulation of the realities, because it accomplishes exactly what Soros says it does--it concentrates capital in the Western hands of the few at the center of the First World. It only further serves those few to imagine that these events are "accidental." Soros' contention that the undoing of a process is inherent in its own structure holds true at even the basest level--perhaps from the universal perspective that that which lives also dies. It is a myth that the capitalist structure based on unlimited growth will go on into infinity.
Posted by: Lambness | Nov 24, 2008 12:14:01 PM
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