George Soros : Super-Bubble Hypothesis

Soros begins this chapter with the pronouncement that history does not repeat itself.  He lists a string of collapses from the past 30 years that follow a pattern of disasters, but not the harbingers of a new Great Depression.  Rather he calls the 2008 collapse the end of an era, that the markets must change.  Soros calls attention to new factors that influence American markets, especially the arrival of China and India into world economic pictures.

A first bubble to study is the US housing market, which has enormous consequences due to its immense size.  Because of the exponential growth of the market from 2002 to 2008, a enormous bubble grew very uncontrollably.  Rules broke down, and people financed huge amounts without any collateral.  Even Citibank warned that immense consequences could occur.  A few shakes occurred, and the Fed simply stabilized them.

Reagan called these odd little bubbles and the ways of stabilizing them "magic."  But reality says differently.  Such men heralded the whole system as laissez-faire.  Soros says that the perception was flat false.  Three separate trends combined to drive the bubble.  Part was the assumed fundamentals learned from the Great Depression on how to act against problems in the economy.  Another problem feeding in was the globalization movement. And there is a pattern of disparities.

Globalization corrections came with the 1970 oil crises.  Markets tried to respond to the way the oil crises of that era interrupted economies around the world, especially America and Europe.  The US manipulated the world complications deliberately, and continued to do so afterwards.  Sometimes these manipulations delivered the US with immense deficits.  One way to stabilize markets was to get Japan to invest (now China) to even out the swings.  Countries who were saving were called on to let loose their savings.  In 2008 the markets hit a tipping point.  The US would hit the wall, and it will need to change its approach to such crises.  One can follow Japan since the 1980s to see the concerns.

Soros says that we must not follow Reagan's strategies because they do not fix things, because they are not magic  His methods were short term, and they complicate the long term.

The theory of reflexivity accounts for the mess.  We must see the reality, and adjust to it to stay away from future super bubbles.  The long held "laws" of economy no longer work.  The reality will not allow them to continue as laws, because they are not laws.  Soros wants to look and current developments as new history. We should expose and work with the realities.

This particular chapter stands very critical against Keynsian principles, and strongly against the magical views of the Reagan administration.  True, pumping money into the system helped reverse the troubles of the 1970s, but it only created a new form of crises in the face of its underlying absurdities--namely bubbles.  Soros suggests that the markets must fix the problem, that of finding another way of propping up the economy in times of financial crises.

Whereas Soros tends to support the Obama administration--one that is using Reaganesque methods to prop up the economy, how does theory of reflexivity translate into a solution for the crisis of 2008?