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  • The worst market crisis in 60 years

    Hmmmmm, interesting read.

    The worst market crisis in 60 years

    By George Soros

    Published: January 22 2008 19:57 | Last updated: January 22 2008 19:57

    The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.

    However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.

    Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral. Ease of credit generates demand that pushes up the value of property, which in turn increases the amount of credit available. A bubble starts when people buy houses in the expectation that they can refinance their mortgages at a profit. The recent US housing boom is a case in point. The 60-year super-boom is a more complicated case.

    Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.

    Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced. The US current account deficit reached 6.2 per cent of gross national product in 2006. The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared.

    The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.

    Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks’ commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.

    Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.

    Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.

    The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.

    The writer is chairman of Soros Fund Management

    http://www.ft.com/cms/s/0/24f73610-c...077b07658.html

    .

  • #2
    I don't think your summary of the article via the thread title is accurate. I don't think Soros is saying it's the worst market crisis for 60 years. I think he's saying that the basis for post-WW2 prosperity and dollar domination of the world economy is ending after 60 years. He may or may not be right on that, but anyone who lived through the mid-1970s market and recession crises will tell you that things were far worse then. The present crisis certainly has some unique features, however, I'll give you that.

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    • #3
      Soros has about as much credibility as the Iraqi Information Minster did.

      The guy lives for trying to bring down the U.S. economy (so as long as a Republican is President) or in his spare time, reeks economic havoc in other parts of the world.

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      • #4
        I agree, Soros is a billionaire wing-bat.
        My Flickr Pictures! Click Me!

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        • #5
          Buy.

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          • #6
            Meh, I actually like it this way, both US housing prices and the Dollar are so depressed right now that a nice fully-equipped 4-bedroom house in Florida can be had for €120.000 . For that price you would be hard-pressed to find an empty 2-bedroom house in Hamburg.

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            • #7
              Originally posted by Ike
              Buy.
              Houses?

              I heard shares of the French bank Societé Generalé are quite affordable at the moment.

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              • #8
                The crisis is mainly in the finantial business for the reasons we know (for those who don't know it's too long to explain what the "subprime crisis" is). And nobody knows if it has ended as well as nobody knows if next there will be the so-called "credit-card-crisis" and a dump in consumption in the US.

                What is being known now is that those finantial institutions which were in deep trouble managed to get investors to put the money in they needed. And speculation is going around that these investors (mainly arab and far-eastern societies) will do everything possible to avoid a recession and a major drop in the value of the US dollar (otherwise their huge reserves would drop in value as well).

                All the rest is guessing.
                Last edited by Carlos G.; 2008-01-25, 14:16. Reason: spelling

                Comment


                • #9
                  Originally posted by Carlos G.
                  The crisis is mainly in the finantial business for the reasons we know (for those who don't know it's too long to explain what the "subprime crisis" is). And nobody knows if it has ended as well as nobody knows if next there will be the so-called "credit-card-crisis" and a dump in consumption in the US.

                  What is being known now is that those finantial institutions which were in deep trouble managed to get investors to put the money in they needed. And speculation is going around that these investors (mainly arab and far-eastern societies) will do everything possible to avoid a recession and a major drop in the value of the US dollar (otherwise their huge reserves would drop in value as well).

                  All the rest is guessing.
                  All the bad guys (criminals, oil scheichs (wie zum Teufel schreibt man das??), Chinese, the evil capitalists) have parked their money in USD, at least to some extent. Very good to know that all wealthy people sit in the same ship and have an interest in hull repair in case of Torpedo hit.

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                  • #10
                    Originally posted by Schorsch
                    (wie zum Teufel schreibt man das??)
                    Sheik, or Sheikh.

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                    • #11
                      Trying to bait MR. Hildrich to sign up with this tread?

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                      • #12
                        Originally posted by DAL767-400ER
                        ... a nice fully-equipped 4-bedroom house in Florida can be had for €120.000 .
                        Wait another year. Florida has further to fall before it rebounds, as do a lot of markets in the U.S.
                        Trump is an idiot!
                        Vote Democrats!!

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                        • #13
                          Originally posted by Peter_K
                          Trying to bait MR. Hildrich to sign up with this tread?
                          Why does everyone keep missing David Hilditch? I missed him too, at first, but not anymore. I missed Nav5 for a little bit longer but now I don't miss him, either.

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                          • #14
                            Originally posted by Half Bottle
                            Why does everyone keep missing David Hilditch? I missed him too, at first, but not anymore. I missed Nav5 for a little bit longer but now I don't miss him, either.
                            Because Hilditch was a summity on that field? But that was the trouble on ad.com: Everybody thought, the only one. The same goes for ITS who everybody treated as the last coke in the aviation desert.

                            Sticky, really.
                            Res Severa Verum Gaudium

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                            • #15
                              Originally posted by Chris Kilroy
                              Wait another year. Florida has further to fall before it rebounds, as do a lot of markets in the U.S.
                              It's not like we could buy now anyway. We're in the process of selling our property ourselves, and the buyer doesn't pay before they have the building permit from the authorities, which can still take between 6-12 months. But it is good to already have a rough estimate on what you could get for what price .

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