Writing in today’s Financial Times, billionaire and
philanthropist George Soros calls out Hank Paulson, the US Treasury Secretary for not doing enough heavy lifting to improve regulation of financial institutions. He calls for
new thinking not reshuffling of regulatory agencies.
Importantly, he not only questions but denies altogether the idea that markets are self-correcting.
For the past 25 years or so the financial authorities and institutions they regulate have been guided by market fundamentalism: the belief that markets tend towards equilibrium and that deviations from it occur in a random manner.
Soros, for the sake of disclosure, is a funder of The Columbia Journalism Review through his Open Society Institute. We’re sure he’s checking on us right now, in fact.
Still, we find his focus on this fundamental belief useful for those of us trying to understand the turmoil in the U.S. housing market and global credit markets.
Authorities, caught unawares, responded to each new disruption only after it occurred. They lacked the ability to foresee them because they were in the thrall of the market fundamentalist fallacy. They need a new paradigm. Market participants cannot base their decisions on knowledge, or what economists call rational expectations. There is a two-way, reflexive interaction between the participants’ biased views and misconceptions and the real state of affairs. Instead of random deviations, reflexivity may give rise to initially self-reinforcing but eventually self-defeating boom-bust sequences or bubbles.
Soros’s credentials as a market theorist are bolstered, of course, by his record as a market practitioner. The man made a fortune, unlike the editorialists and columnists who still have to work for a living.
He is making a splash in the media today as he releases his latest book, “The New Paradigm for Financial
Markets: The Credit Crisis of 2008,”
as an ebook, which expands on the ideas in his opinion piece in the
FT and explains why he thinks we are in the worst financial crisis
since 1930.
