George Soros on The Crash of 2008

Since the current economic crisis began, I have been searching for books that coherently address the key questions of the day without pointless jingoism, chest-thumping or moralistic tut-tutting. To that end, I have been studiously avoiding all the books about 'Easy money, high rollers', or 'Wall Street's greed' or 'Hubris and Wretched Excess'. Though not a Wall Streeter myself, I am after all a banker. Maybe that distorts my moral center, but it is fact that I have found much of this vilification of my richer cousins by trade only mildly useful at best and a version of 'cut my nose to spite my face' at worst.

The first book I read about the mess we find ourselves in was Paul Krugman's The Return of Depression Economics. My second, and the subject of this post, is George Soros' The Crash of 2009 - And What it Means.

The sub-title of the book is 'The New Paradigm for Financial Markets'. And that should have set off my alarm bells. Which coherent author uses the word 'paradigm' in a sub-title? Well, it didn't and I was fooled by the shortness of the book (~250 pages), which I mistook for pithiness. Here is what I found.

The book is split into three parts, called 'Perspective', 'The Current Crisis and Beyond' and 'The Crash of 2008 and what it means'. The first part is too muddled, the second is mildly interesting and the third is quite banal.

Soros frames up his discussion of the crisis of 2008 as an illustration of his broader principle of 'reflexivity'. The first part of the book essentially lays out Soros' articulation of this principle and its cousin - the boom-bust theory. Reflexivity is the thesis that in any humanly constructed structure (like the financial markets), the relationship between reality and perception is not a one-way street. Market players form an expectation based on fundamentals ('house prices will increase next year'). They act on this view and slowly it gets incorporated into market fundamentals themselves in a sort of ever increasing feedback loop (increasing house prices causes better performing mortgages, which drives lower underwriting standards, which creates increased demand for houses thus raising house prices even more).

Soros' thesis is that this feedback mechanism between reality and expectation is pro-cyclical and feeds on itself (the boom) till the gap between reality and expectations gets far out of hand. At this point, market players keep playing a sort of 'emperor's clothes' game where everyone realizes the fundamentals don't exist but they keep trading as if they do. At an arbitrary 'tipping point', without any significant external stimulus, the whole edifice comes crumbling down in a catstrophic downward acceleration (the crash).

That's pretty much the summary of the first third of The Crash of 2008. Which is fine, as far as it goes. But here's the thing. It unfolds over a hundred pages. And the moment Soros wears his philosopher hat, he loses all coherence. Sample this: 'Without fallibility there would be no reflexivity - if people could base their decisions on knowledge the element of uncertainty that characterizes reflexive situations would be removed - but fallibility is not confined to reflexive situations.' What's that again? I admit Mr. Soros has 11 billion pieces of paper proving he is smarter than me. But if I may sir, I would like to say this: much of your philosophy is indulgent, pretentious and pretty close to undecipherable. Where it is decipherable, it is either obvious or unusable.

When Soros starts talking about the origins of the 2008 crisis, he is much more interesting, though far from insightful. He takes the stand that the resolution of the crisis requires market participants, government and regulators to give up on the philosophy he calls 'market fundamentalism' - the theory that if we let markets run unhindered, they might wreak havoc for a while but eventually equilibriate and will lead to sustainable solutions. He holds this 'fundamentalist' belief in the market responsible for much muddled policy making in the past few years.

Soros' policy prescriptions fall largely in the current mainstream, with some interesting twists. He calls for a 5 point program to attack the problem - a fiscal stimulus, an overhaul of the mortgage market, recapitalization of banks, a new energy policy and reform of financial banking regulation. His detailed prescription on the mortgage side in particular is refreshing and extremely well informed.

All said, if there were a twenty page version of The Crash of 2008 that I could lay my hands on, I would have been much the happier. As it turns out, I have just read one more less than stellar book on the credit crisis. The search for the perfect book on this topic continues ...