George Soros: We are facing the worst financial crisis since the Great Depression

Posted: April 4th, 2008 by: h2

The difference between how the mainstream media is reporting the current economic situation and how people who actually understand the stuff because they work with it day to day is quite astounding. This is the kind of article that you have to read yourselves, pretty much every sentence is worth some pretty serious thought.

“We are facing the worst financial crisis since the Great Depression”, Soros writes in The New Paradigm for Financial Markets, a book rushed online this week. The culprit, he says, is a misconception that markets can correct themselves, no matter how we short-circuit them with easy money, massive leverage and brain-bending synthetic instruments.

“The belief that markets tend towards equilibrium is directly responsible for the current turmoil,” the billionaire philanthropist writes. “It encouraged the regulators to abandon their responsibility and rely on the market mechanism to correct its own excesses.”


“This will have far-reaching consequences,” writes Soros, 77. “It is not business as usual but the end of an era.”

What we are witnessing isn’t your ordinary boom and bust, he says. It’s the culmination of a “super-bubble” that began ballooning in the 1980s, when U.S. President Ronald Reagan and U.K. Prime Minister Margaret Thatcher were in power. Borrowing swelled and financial regulations were relaxed in the belief that the market mechanism would keep things on an even keel.

“President Ronald Reagan called it the magic of the marketplace,” Soros writes. “I call it market fundamentalism.”

As the 1990s approached, the belief in efficient markets that tend toward equilibrium became entrenched in financial institutions, where quants armed with Ph.D.s and personal computers spat out ever more complex strategies and instruments for coping with risk and diversification, as Peter L. Bernstein reminded us in his recent book, Capital Ideas Evolving.
The U.S. housing bubble is Exhibit A. Cheap money fueled more lending, which changed the value of the collateral. Other examples include the conglomerate craze of the 1960s and the international banking crisis of the 1980s, Soros says.
src: Soros: Bloomberg

In a sense, what more needs to be said? The problem lies with failing to see that the US economy is not merely riding a cyclical event, but that it, like most of the rest of 20th century industrial civilization, and human populations in general, were first rising up the slope of commodity production, and have now hit what is going to almost certainly prove to be the peak of that slope.

Since our present religion of Growth was constructed during the last few centuries, it is going to be very difficult to conceptualize what a society without growth will look like.

Soros is absolutely right to note, unlike for example Reich in his latest book, reviewed here recently, that what is happening is a profound shift away from the status quo, which was already quite unstable, with cycles of 20 years or less considered an entire era, eg the post WW II boom, from about 1950 to 1970, which was in fact nothing more than the steepest part of the growth curve, right before it hit the peak.

One problem with putting economics first, as is so often the case in our society, is that it simply ignores truly material concerns and limitations. We are now seeing this problem highlighted more and more, as the economists’ absurd faith that higher commodity (especially oil) prices would result in more production, as if the planet were a factory that churns out what we need on demand.

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