George Soros on What To Do Now

Last Updated Nov 21, 2008 2:25 PM EST

George Soros says we need to reinvent how markets work. His essay The Crisis and What To Do About It is worth a read. It argues that our fundamental understanding of financial markets, that they tend towards equilibrium (prices reflect that demand and supply are equal) and any deviations are random, saying
The severity and amplitude of the crisis provides convincing evidence that there is something fundamentally wrong with this prevailing theory and with the approach to market regulation that has gone with it.
He says instead we must consider what he calls "reflexivity,' the idea that financial markets are never completely accurate pictures of an economy, and occasionally they create a kind of Dorian Gray image. Couple this Dorian Gray market with what he calls a deregulation-driven "superbubble," and we have the mess we're in today.

Soros says regulators need to add some tools so they can regulate credit markets. He prescribes:

  • variable margin requirements;
  • minimum capital requirements;
  • forcing any new financial engineering products to be registered and approved by the appropriate authorities before they can be used.
That last is tricky he acknowledges, since financial engineering exists to get around regulations.

Lastl, he warns against the perils of the regulation pendulum swinging too far.

In view of the tremendous losses suffered by the general public, there is a real danger that excessive deregulation will be succeeded by punitive reregulation. That would be unfortunate because regulations are liable to be even more deficient than the market mechanism. As I have suggested, regulators are not only human but also bureaucratic and susceptible to lobbying and corruption. It is to be hoped that the reforms outlined here will preempt a regulatory overkill.
An interesting discussion, though I would've liked it to be a little less about how we got here and more on why he thinks his provisions will work.
  • Michael Fitzgerald

    Michael Fitzgerald writes about innovation and other big ideas in business for publications like the New York Times, The Economist, Fast Company, Inc. and CIO. He’s worked as a writer or editor at Red Herring, ZDNet, TechTV and Computerworld, and has received numerous awards as a writer and editor. Most recently, his piece on the hacker collective the l0pht won the 2008 award for best trade piece from the American Society of Journalists and Authors. He was also a 2007 Templeton-Cambridge Journalism Fellow in Science and Religion.