Book Review: George Soros’ 'The New Paradigm for Financial Markets'

Legendary investor George Soros recently released a new book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means.

The underlying thesis of the book is that the current financial system has been built on a false paradigm, namely that financial markets tend towards equilibrium. This misleading paradigm has directly resulted in the financial woe that we’re experiencing.

Soros’ paradigm, which he started developing when he was a student at LSE, is the concept of reflexivity - the idea that prices influence the underlying fundamentals and that newly-influenced set of fundamentals proceed to change expectations, thus influencing prices - a self-reinforcing pattern. Because outcomes after each cycle are different from the previous outcome, this theory is often termed the discordant with equilibrium theory.

The first part of the book is all about the theory of reflexivity. The second part of the book talks about the current financial crisis and where we are headed beyond 2008.

Soros explained a lot of interesting concepts in the book. The main takeaways I got from the book are:

• We need a new paradigm, whether its reflexivity or something else; the previous equilibrium paradigm simply does not hold
• Although the US in a recession, there’s no reason to expect a global recession due to significant expansionary forces among countries like China, India, Russia and other emerging economies
• New bubbles are forming – raw materials, energy, agriculture
• A period of political and financial instability is around the corner as the rest of the world Challenge’s United States’ dominant economic power and the USD as the global reserve currency
• China’s rising renminbi will create further problems for the United States
• Policy changes are a means to achieving a more stable system
• Short US and European stocks, US ten-year government bonds, and the US dollar
• Long Chinese, Indian and Gulf State stocks and non-US currencies

Click here to purchase the book.

Disclosure: None

Comments

[kurt walter:]

The U.S. is NOT in recession. I know liberals like Soros have been talking the economy down. But we have not have 2 straight quarters of negative GNP. In fact, we haven't had 1 quarter, yet.

2008 May 21 11:45 AM

[polymorphic:]

Hi - I agree with your summary of Soros' book. It should be worth noting though that the first part of the book has some loopholes. It doesn't detract much from the intent of the book - but had he shortened that, it would have been a lot more succinct and direct to the point.

@kurt walter: It was May 21st when you wrote that comment that the US is not in recession - and that "liberals like Soros have been talking the economy down". Well, two things: (1) look again - it's July 29 - Dow is down significantly and other macroeconomic indicators are essentially showing signs of a recession - or OK, a slowdown; and (2) your comment that "Soros have been talking the economy down" is exactly what Soros is talking about - "the market reflects what we believes it to be". Is it Soros' fault? Is it the liberals'? Not necessarily. But surely, a part of the downtrends are determined by the reactions that investors - individual and corporate - towards the initial results that the market had indicated. It is a vicious/virtuous cycle - and I believe that that is Soros' point. The only thing is, contradicting what has now become a reality/phenomenon - that the US may be in recession - unless it reaches critical mass, will not overturn and break the cycle; shout louder - it just might help.

2008 Jul 28 06:12 PM