Soros: End of the 60 year Super boom

[LaWood]

The worst market crisis in 60 years

By George Soros

Published: January 22 2008 19:57

excerpts:

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.

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.

Fundamentalism at work:
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.

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.

http://www.ft.com/cms/s/0/24f73610-c91e ... 07658.html

Edited by Savonarola 20080124 2306: LaWood needs to learn how to use the Preview button

[Barbara Fitzpatrick]

I'm actually surprised the Fed managed to stave this off as long as it did. I saw it coming back in the Reagan years. Bill Clinton put a whole lot more faith in Alan Greenspan than I did, and when Greenspan sold out (end of the'90s when he stopped warning about the instability of the dot com bubble), well! W, of course, is going to do nothing but make it worse. Borrowing more money from China for more tax cuts and a "rebate" that might be equal to one month's mortgage - depending on where you live - and doesn't address people who are not paying taxes (fixed income, low income, etc) only looks good to people who aren't paying attention. (Both John Edwards and Hillary Clinton have decent plans to get us out of this mess - combination of freeze on foreclosures and ARM adjustment, winter heat assistantce, and green and infrastructure jobs creation are the main points.)