Book: “The Crash of 2008” by George Soros.

George Soros, “the man who broke the Bank of England”, gives us his personal perspective about the Financial Crisis. I have been reading this book for several months and I couldn’t finish it until now. So, let’s write something about his live and what we can learn from his experiences.

George Soros was born in Hungary in 1930. After the Nazy occupation, he emigrated to study Economics in London by his father’s recommendation. When he accomplished his studies, he moved to New York City where he started working as an arbitrage trader. Then, he had a considerable success as a financial investor by putting in action his famous “Reflexivity Theory”.  At this moment, he holds the 28th position of the World richest people in 2009 according to the Forbes magazine.

This book was written in 2008 and is focused on his support to his “Reflexibility Theory” and his point of view of the global Financial Crisis. He starts explaining that the prevailing paradigm, the Economic Theory, is wrong when tries to explain the financial markets as a natural science. Economic Theory argues financial markets tend toward equilibrium as the natural science does and from his perspective, it is a mistake.

His Reflexivity Theory is based on the principle that live is inherently imperfect and market participants cannot base their decision on perfect knowledge instead cognitive (subjective) reasons. Therefore, he can explain in a simple way the capital flows, financial burbles and credit crunches.

Furthermore, he attacks the prevailing Economic Theory by saying this paradigm asserts that market participants, in pursuing their self-interest, base their decisions on the assumption that the other participants will do the same. And to him, this is not reasonable because participants act not on the basis of their best interests but on their perception of their best interests, and the two are not identical.

In the second part of the book, he focuses his attention on the current crisis and its consequences. Mainly, we can summarize the subprime crisis was merely the trigger that released the unwinding of the super-bubble and both, the housing bubble and the super-bubble have been characterized by the excessive use of leverage.

The third part of the book is an updated extension from the first edition. The point most important, it is when he explains the five components that the economic recovery program must embark.

  1. A fiscal stimulus package.
  2. A thorough overhaul of the mortgage system.
  3. Recapitalization of the banking system.
  4. An innovative energy policy.
  5. Reform of the international financial system.

I would like to focus on the fourth point, the Innovative Energy Policy. According to his opinion, alternative energies and energy savings can be the motor of the global economy if the price of conventional fuels is kept high enough to justify investing in them. Hence, President Obama must impose a price on carbon emissions and import duties on oil to keep the American price above the 70 $ per barrel.

Conclusions:

The first thing that surprised to me was his obsession with his Reflexivity Theory. It reminds me another book which speaks about the human behavior on decisions making, “The Black Swan” by Nicholas Taleb (He holds the 40th position in the Most Influential Gurus). In my opinion, I share their opinion that cognitive behaviors have a very important role on our lives. However, I support the Classical Economic Theory that says in the long term fluctuations are dispersed.

The next thing that I want to highlight is his predictions on global markets. The book was updated in 2009, and George Soros could foresee the riots in Greece, the Euro’s weakness and the financial problems in Spain. This last reasoning and the George Soros’ recognition make me sure he is a talented person and I will give a vote of confidence on his “Reflexivity Theory”.

“The Crash of 2008” by George Soros. Mark: 6/10.

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