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?

Soros--Chapter 3 Theory of Reflexivity

This contains the theory of reflexivity that George Soros formulated after several years of thinking and studying.  People have to deal with fallibility because the ability to have all the knowledge does not exist.  People must rely on imperfect human processes to understand the world, so they must rely on metaphors, similes, figurative language, and other imperfect tools to come to understandings.  People must also understand that they participate in the system at the same time--there is no opportunity just to observe.  Success must rely on our imperfect facility with words.

Soros says that the man must differentiate between subjective and objective perceptions about reality.  We react to our observations.  Dealing with markets, those who function, must also deal with a group buy-in of the rules.  Reflexivity gives a person the ability to correlate the belief systems and reality.  Reflexivity explains how participants who think will act in the face of events, the group interpretation, and the actual reality.

Soros explains how this philosophy works against Western thinking, going back to notables like Plato.  More recently, the theory stands strongly against principles of the Enlightenment and thinkers like Descartes.  As time passed, several philosophers saw the optimistic errors of the Enlightenment--such men as Popper and Russell.  Wittgenstein pursued some of the paradoxes, and abandonned an attempt to find a pure language.  He maintained we stay with the language as it is.  Soros calls the problem "fertile fallacy".  It describes the hopeful tendency to promote movement when knowledge is missing.

Karl Popper made a break from this.  He proposed a streamlined scientific method.  Prediction, explanation, and testing became his model.  He maintained that we can't verify; we can only falsify.  If a hypothesis cannot be falsified, then it is useful.  Soros learned that going against strongly held public opinions tends to lead to the greatest successes.

Reflexivity helps a person to throw out the least useful.  The purpose of politics is to stay in power, so he uses that in formulating his plans.  Unlike politics, one must unearth the misconceptions in order to succeed, and if possible get them established in politics.  This caused Soros to inspect the unintended negative results of the War on Terror after September 11 and the oddities of financial world based on false material before 2008.  We must find the false beliefs and replace them with the truth.  The false beliefs destroy.

Soros relates a Bush administration pronouncement that reality is the construct of the people because of how they think.  He hints that the origin was Karl Rove.  Truth is what they would make it, and the people would follow it.  But reality caught up with it. Politics is interested in power, not truth.    A good society must pursue truth and reality.  It should not be manipulated to maintain a power base.  The search for truth has been manipulated, so truth and reality must be brought in.

People must realize that the idea of absolute truth is too dangerous.  People must seek the reality.  Beware the false metaphor:  The War on Terror.

This chapter has enlightened me as to why the GOP fears and loathes Soros.  I don't know how the Democrats view him.  It also calls us all to use our heads, to study what really is taking place and to discard commonly maintained beliefs unless they can be substantiated.  I really don't know if I really believe he has engineered anything new.  It sounds like old fashioned skepticism to me, but with a twist.  His views are not pessimistic or nihilistic.  I see possibilities.  I think it practical enough to use outside the economic arena--for example in literature, or in writing.

Soros--The Core Idea

George Soros (The Crash of 2008 and What it Meant;  the New Paradigm For Financial Markets) begins with the axiom that life is imperfect.  Man attempts to function in this imperfect world using a set of principles, and he tries to make an impact.  Generally a person attempts to operate with both approaches simultaneously.  Reflexive situations occur as a person encounters reality.  The notion that all transactions follow a supply and demand relationship does not always function.  Uncertainty messes up the easy paradigm and demands a correction in the equation.

Too much of economic theory has a self referential paradox.  It imposes itself upon itself, and may not always depict reality.  Reflexivity attempts to correct the erroneous in the social relationships.  Ideologies can lead people into the wrong places.

I find this new theory of economics worth inspection.  Certainly nations have found themselves terribly caught up in enormous panics as the majority becomes disillusioned.  Holding on stubbornly to a paradigm that fails only engenders more failure.  

I not only want to study Soros's new paradigm, but I want to see how others see it.  

George Soros.  The Crash of 2008 and what it Means; the New Paradigm for Financial Markets.  2008-2009.

Introduction in the book:  Soros says that the US no longer functions on the traditional economic system, that the superboom of the past 25 has ended.  The financial markets do not reflect underlying realities.  What often emerges has distortions.  The distortions tend to impact the market prices.  Soros says he started his career with a strong background based on ideas of Karl Popper.  Soros forwarded a theory of reflexivity, that many dismissed.  His views led him to become a wealthy hedge fund manager.  Perception and reality strongly influence what takes place in the markets.  The prime example is seen with bubbles.  Soro calls the housing market a bubble, but he also speaks of a super bubble, far more complicated than the housing bubble. 

Soros interests me.  Almost every person I have spoken with has dismissed him, but the same people admit they have never read his ideas.  I'm the kind of person that must find out for myself.  In this introduction I see that Soros is rejecting the generally accepted notions of economics, claiming that too many variables are at play, and that a person must look at the economy on a deeper level to find clarity.