Last Updated Nov 21, 2008 2:25 PM EST
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.
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.