George Soros’s New Book - The New Paradigm for Financial Markets - A MUST read for those into resilient markets & RISK - and resilient innovation in a TOTAL State change in the USA
Published in the USA in 2008 by Public Affairs, this book not only talks about George’s ideas for a new framework for financial markets, but explains his underlying theories as to why the system needs to change. It also exerts and illustrates WHY our current approach to RISK is absurd.
The surprising thing is, that though his language is not explicitly the same as ours (or that of resilience or complex adaptive systems), many aspects of our thinking are implicit in his theories. The book is a relatively small read - some 162 pages, and it can be intense - but a MUST read for those wanting to understand and defend a new approach to a very old, lame and unworkable chestnut called financial market economics.
In adding to my description of this piece, I won’t labor the reason for reading it, or its content. I will leave that for you to make your own mind up. The one section I will highlight - and in particular to support some of Todd’s assertions (and underscored in my Perfect Storm piece on the decay of superficial value creation) - starts on page 116. Here is part of it (my comments in brackets):
“Then came the technology bubble that burst in 2000 and the terrorist attack of Sept 11 2001. To prevent a recession, the Fed lowered the federal funds rate to 1% and kept it there until June 2004. That engendered the housing bubble, in which financial innovations played a major role. With the spreading of risks, more risks could be taken. Unfortunately, the risks were passed on from those who were supposed to know them (the risks that is) to others who were less familiar with them (eg. the poor people in Norway and the Melville City Council in West Aust. who lost citizen funds when scooping up bunky mortgage security bonds). What is worse, the newly invented methods and instruments were so sophisticated that the regulatory authorities lost the ability to calculate the risks involved. They came to depend on the risk control methods developed by the institutions themselves (and still do I might add).The latest international agreement on the capital adequacy requirements of banks - Basel 2 - allows the largest banks to rely on their own risk management systems. Something similar happened to rating agencies who were supposed to evaluate credit worthiness of the financial instruments, They came to rely on the calculations provided by the issuers of those instruments (is that code for the inmates are running the insane asylum?).”
George continues:
A key context to all of this is that George refutes the idea that, markets always find equilibrium, and that observers and their actions have little to no effect. He understands that markets are complex adaptive Ssystems and all are participants. What I would assert is that George’s argument and theory illustrates that the US economy has, over time, breached many thresholds. In doing so, the localised and immediate impacts have been masked with short-term quick fixes that deny the longer-term systemic issues. In doing so, past costs have been deferred to the future for others and other times to deal with. The bottom line is that NOW, the US is in a total state change.
No matter what is done, the future cannot be based on propping up the systems of the past. It is over. That is not to say that innovation in the ‘new’ US economy won’t work or is not worth it. Like I stated in the Perfect Storm article - if the agents of change are willing to think differently, accept the state change, apply resilience thinking and resilient innovation process to the reinvention, then though there will be a lot of muck, there will also be money.
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July 1st, 2008 at 5:15 am
Interesting local side note: Soros recently invested in the turn-around team at the until-recently-in-foreclosure Pawtucket Mutual Insurance Company. Laz, I think you remember Nick Steffi, who’s the CEO. So Soros and some others gave them $200 million. The business plan: be the insurer of last resort in disaster-prone areas. Not exactly on point here, but another indication of how resilience thinking is bubbling up everywhere. Here’s my convoluted coverage The Bucket Blog, spinning the financial stuff off of an art contest the insurance company sponsored.
Cheers.
July 8th, 2008 at 9:52 am
Thanks Speck (woops Frymaster). Interesting that Mr Soros would be investing in ‘insurance of last resort’. Given his view of the financial system it may be that he also sees the future of insurance in a different way to the average insurer? It may be interesting for Fred Pres to speak with Nik Steffi in regard to the Blackstone Alert project?
Laz
September 20th, 2008 at 11:16 am
[...] Our situation is more complex than that. What is needed is a complete overhaul of the system. George Soros is a large beneficiary and critic of the system. One of George’s fundamental concerns is [...]