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Financial Turmoil in Europe and the United States: Essays Hardcover – February 7, 2012
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Soros is someone who has made his billions anticipating the reaction of markets to ordinary realities, pleasant and otherwiseso it's well worth paying attention to his views on the world's financial systems. Not for the faint of heart or the innumerate. For policy and financial wonks, a bracing read.”
The current financial crisis is explained concisely with eloquence. Understanding what is happening and what is to be done is reason enough to read Financial Turmoil. . . . Dr. Soros shows us once again in these essays that he is not only a competent trader. He is an admirable thinker, and an adept policy analyst. If we were all as good at political economy as he is there would be no financial bubblesand there would probably be less financial turmoil.”
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The articles are assembled into four sections, each written in the years 2008 through 2011 inclusively. The articles begin with the onset of the crash in 2008 and end addressing the Euro crisis as it unfolded through the end of 2011. Those in the first half of the book (roughly) cover the need to provide liquidity to the banking and finance sectors in the immediate aftermath of the 2008 crash. Soros was opposed to the form of Paulson's original TARP plan, which would have provided Paulson with a blank check to act as he pleased, and instead proposed an injection of liquidity in the form of equity into the banking and finance systems instead. Soros makes the case that this would have been more efficient than ridding the banks of "toxic assets". Firstly, because it would have been quicker to engage in and secondly it would have avoided the issue of attempting to value the toxic assets which were very difficult to value anyway. What he overlooks, however, is the fact that this would have probably required the U.S. to nationalize many banks (much like Sweden did during its banking crisis of the 1990s). In these essays, like those throughout most in the book, he very unfortunately ignores the political feasibility of what he proposed albeit his strategies are excellent solutions, at least from a purely academic perspective.
In the essays covering 2009 and 2010 he mostly concentrates on reforms needed to bring bubbles under control or, at least, to mitigate their size. Examples of reforms he proposes in these sections of the book include passing legislature to make CDOs more transparent and reducing the degree of financial leverage. Again, these are good ideas and can work towards the goal of reducing bubbles but in terms of political feasibility they do not seem very likely, unfortunately, to pass the legislatures in either the U.S. or most of the major industrial nations. Considering how important political feasibility is, it is an issue that should have been addressed.
In the last section of the book, covering 2011, he looks at the topical issue (at least topical as of the beginning of 2012) of the Euro and how to solve (or at least mitigate) the problem of the Euro's liquidity. His recommendation is the creation of a Treasury to back the Euro (primarily through bond issuance and bond guarantees) along with providing the European Central Bank with more authority to control monetary supply. He makes the argument well that these steps are the only ones that can prevent a depression in Europe (and possibly the rest of the world being transmitted through Europe). Very unfortunately, again, his essays ignore the political reality. Particularly German opposition to the creation of such institutional changes. In addition, he ignores to address the issue of how much monetary reserves can be made available through such institutions and whether or not they will be sufficient for the purpose. These are two issues that should have been addressed, both in terms of how to overcome them and what the probability would be of overcoming them.
In short, Soros' "solutions" are intellectually sound, at least in the modern (and mainstream) framework of current lines of macroeconomic and international financial thought. His "solutions" are, pretty much, the same as those coming out of most central bankers and academic economists mouth. Very unfortunately, his articles do not address the very important issues of political (in all cases) and economic feasibility (in terms of what he proposes for the Euro). How feasible are his proposals in terms of probability of actually being implemented due to political or economic restraints? What can be done for their successful enactment (i.e., how can the political economic constraints inherent in his proposals be overcome)? These essays needed to include serious and in-depth discussions of these issues. The absence of such discussions prevents this reviewer from granting this collection of essays a five star rating.
There are now plenty of books about the credit crisis but they mostly explain what happened without giving much of an indication of how to find a way out. As of this writing (Feb. 2012) we are still in the thick of it and Soros' articles are usefully light on apportioning blame (we already know who did it) with the majority of the text dedicated to finding realistic solutions.
He sees the root of the problem in assets that were previously seen as riskless, but which are now, on the contrary, perceived as full of risk or maybe even worthless (e.g. AAA Sub Prime or Greek government bonds) and he goes directly to the point in suggesting that banks should keep their non-performing assets (it was their mistake after all) and receive large equity injections to keep them afloat and in the business of lending.
He accepts that this would be costly and he also sees a very important role for government in a) stopping the inflation of bubbles by controlling leverage and insisting on transparency b) banning outright credit default swaps that he sees as only serving to allow the completely dangerous unlimited shorting of bonds.
The sovereign debt/ Euro crisis is presented as needing serious and effective central financial control in the form of a European Treasury with the right to tax and control spending, although he recognizes the many political hurdles that need to be crossed to reach the finishing line of a safe Euro and responsible government budgets.
Soros bases his analysis throughout on a "reflexive" view of economic affairs in which positive or negative feedback cycles frequently distort supposedly "efficient " markets. He notes that investment/ speculation in new technology often shows reflexive distortions in the use of capital but he doesn't consider that reflexivity itself could be a natural mechanism that has evolved to ensure that every new niche is fully exploited. For example, in the relatively recent computing/internet boom, a great deal of capital was wasted but no one would dispute that it aided the eventual winners (e.g. Intel, Microsoft, Amazon or Google) to raise capital when they needed it.