“The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means”

There are many news articles and books written about global financier, George Soros, his beliefs, practices, wrongdoings, etc. but the book that I found most interesting was one which was actually written by him called “The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.” This book gave me an insight and most definitely a better understanding of the current global economic crises that our entire world is facing and more importantly what can be done to get us and the global economy out of such a mess from the perspective of one of the world’s greatest financial minds.

In his book, Soros, explains that the current financial crises was not caused by any one specific external shock like a rise in inflation, devaluation of a specific currency, rising oil prices by OPEC, or any one financial institution defaulting. Instead, he explains that it was caused by the overall financial system itself and the theory that markets tend towards equilibrium and deviations from such equilibrium occur in a random manner due to an external event which markets must readjust is fundamentally wrong and it is proven by the deepness of the current global financial crisis. Soros explains that to avoid further economic and financial shocks in the future will require a complete new way of thinking on how the markets really work.

Reading this book provided me with a better understanding on the events that took place over, not only the past few years, but more like a decade of events which Soros explains all contributed to one of the biggest housing and stock market bubbles of all time. For the most part we all know what has happened over the past few years; however, Soros explains that these events have been building up and the “super bubble” has been rising since the 1980’s just waiting to burst. In brief, as Soros explains, the current financial crises been caused by the growing of property values and on the basis that they would keep rising. On such basis, banks started lending very easily and extending credit freely to new homeowner’s, even those people the banks knew would most probably not be able to pay in the future. The extent of leverage used to finance new homes was tremendous and the creation of new unregulated financial instruments such as, CDO’s, credit default swaps, and a slew of other financial products was all great if home prices continued to rise as everyone anticipated. Then home price began to fall and the parameters put into such financial modeling systems were no longer accurate and we saw a collapse in housing prices, stock market valuations, currency devaluation, a credit market freeze, failing banks, large global financial institutions filing bankruptcy, and pretty much about any other financial problem anyone can think of.

Mostly, I enjoyed reading what George Soros believes should be done to further protect the global economy from future bubbles and to get us out of this one. While he states, that bubbles can’t be prevented, they can be held to a certain level which is mainly up to the regulators such as, the Fed, the SEC, and the Treasury Department to take responsibility, unlike they have been doing. He believes, as well as myself, that it is up to such regulators to take into account credit conditions and also that markets have moods and biases which should be balanced by the regulators. Soros believes that one way to help prevent further crashes and crises is by the tightening of margin and minimum capital requirements, thus reducing the leverage banks take on and reducing risk. He also believes that many sophisticated financial products, such as, CDO’s and CDS’s need to be regulated and any other new financial instruments must be first approved by the authorities. A close eye should also be kept on the regulators because he states that they are not only human but they are also bureaucratic and susceptible to corruption at times.

While many of the proposed adjustments and insights made by George Soros in his book will result in fewer profits by large global financial institutions, both I and Soros believe that it is a necessary step in order to prevent a further deterioration in our financial system and any other future “super bubbles” from forming and bursting. Over all, this was one of the most interesting books I have read and it did help me better understand our current situation and what can be done to prevent future ones. I find George Soros an extremely interesting and intelligent financial mind and his success in the financial world have proved him to be one of the most influential financiers out there today.

George Soros

George Soros is a global financier who was born in Budapest, Hungary in 1930 and is the founder and chairman of many foundations that promote the creation of open, democratic societies based upon the rule of law, market economies, transparent and accountable governance, freedom of the press, and respect for human rights. Life as child was rough as Hungary was taken over by Hitler and Nazi forces which have been deporting the country’s Jewish population to extermination camps. Soros, after attending a conference in the west, while the Soviet Union was taking control of his country in 1946, decided to emigrate a year later to England. With no family, Soros had to support himself and he did so by working as a railroad porter and a restaurant waiter while going to school. He graduated from the London School of Economics in 1952 and was hired as an entry level position with an investment firm, which would be the start of his amazing financial career.

George Soros today is one of the wealthiest individuals brought about by his success in the financial field. His move to New York City in 1956 gave him the opportunity to expand his business horizons and he received a job as an arbitrage trader with F.M. Mayer where he worked from 1956 to 1959. After leaving, he became a stock analyst with the firm Wertheim and Company from 1959 to 1963. In his earlier years, Soros was mainly concerned with philosophy and he actually developed his own philosophy of reflexivity which was based off of the idea of Karl Popper. As developed by Soros, reflexivity is the belief that the action of beholding the valuation of any market by its participants, affects said valuation of the market in a pro cyclical 'virtuous or vicious' circle. While this belief was the start to Soros fortune, he realized that the concept alone would not make him too much money until he went out to investing on his own. In 1967, while working for Arnhold and S. Bleichroeder, he persuaded the firm to set up an offshore investment fund for him to run. He was then running the First Eagle fund and then later on set up another fund, the Double Eagle hedge fund. In 1973, he eventually quit the firm due to investment regulations which restricted his ability to run the funds as he wanted to. He later established his own private investment company that evolved into the Quantum Fund, which is one of the most successful funds to date.

Soros became famous and created mass wealth for himself and his fund on what is known as Black Wednesday or September 16, 1992. He sold short $10 billion worth of Great British Pounds, betting the currency would fall, when the Bank of England was reluctant to raise its interest rates to compare with other nearby nations or to go ahead and float its currency. The bank was eventually forced to withdraw its currency from the European Exchange Rate Mechanism and devalue the pound. On this investment alone, Soros earned roughly $1.1 billion dollars.

Despite the fact that Soros was placing bets against the United Kingdom and later on has profited from betting against other countries as well I believe that his impact on the American and Global Economies is not as bad as many people out there would think. After all, I am a finance major and work in the field as well and the way that I see it is that there are many opportunities out there when other people are suffering. I’m not saying that it is the best thing to do, to make money off of other people misfortunes; however, at the end of the day I don’t think it turns someone into a horrible person by doing so. I’m sure that almost nine out of ten people would take advantage or bet against a currency if they knew that the country was suffering and their currency would fall in value. Warren Buffett said it best himself, “The best time to make money, is when blood is running in the Street.” Overall, George Soros may have had a negative impact on some countries and their economies by placing bets against them but I believe through his philanthropic activities that he is good for the American and Global economy not to mention the financial insights he provides many investors with.

Philanthropy is one of George Soros main interest and can be dated back to the 1970’s when he started to provide money for black students to attend college in South Africa. He has set up many foundations in Hungary to support education and democracy, supported funding for educational programs and internet access to every single regional university in Russia. He has also set up a grant making foundation in China to help foster civil society and transparency. More recently, his philanthropic work includes the Open Society Institute, set up to support develop democratic institutions through Europe and the former Soviet Union. He also supports and funds programs to stop the spread of AIDS, promote freedom of the press, and help establish ways for poor nations to manage their money which will help them promote economic growth and development. Soros is also known for his funding of many groups that supported getting President George W. Bush out of office. Time magazine believes that his philanthropic activities so far have reached, if not surpassed, $6 billion.

I believe that George Soros has been for the most part a force of good in the nation and the world due to all his philanthropic activities and his financial and economic insight he provides to many investors and students. I understand that many people out there may view him as a source of evil due to his involvement with many investments which concluded him taking advantage of another countries or persons misfortune. In my opinion, if it wasn’t him, it would have just been someone else and at least he is now helping many undeveloped countries grow economically and provides funding for education programs and the effort to help spread democracy. To conclude, George Soros is someone I would definitely love to meet because as a finance/economic major and working in the field of finance I find him to be an extraordinary financial mind and I am sure there are many things I would be able to learn from him if I had the chance to speak with him. While reading his book on the current economic crises, his views were very interesting and educational, and I could only imagine what it would be like to sit down with him and have a conversation. I would be very interested as to what sort of advice he would give me in starting up my own fund and any investment ideas.

Bibliography

1. “The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means” By: George Soros

2. “Soros: The Unauthorized Biograpghy, the Life, Times, and Trading Secrets of the World’s Greatest Investor” By: Robert Slater

3. www.soros.com

4. http://www.time.com/time/magazine/article/0,9171,986919-8,00.html

5. http://travel2.nytimes.com/2006/09/13/us/13soros.html

6. http://www.time.com/time/specials/2007/time100powergivers/article/0,28804,1616375_1615711_1615683,00.html