Tuesday, June 17, 2008

George Soros on the Bubbling Economy

George Soros holds forth in McLean's. He makes the extremely valid point that even a moderate contraction in the credit market could result in a large, sustained economic downturn, and that market fundamentalism hasn't done well by us lately (or ever).

Behind the housing bubble, there’s a super bubble which has been growing for the last 25 years. Every bubble has an element of reality and an element of fantasy, of misinterpretation. The reality has been a trend of ever-increasing use of credit, of credit expansion. The misconception is that markets tend toward equilibrium and can be left to their own devices, to take care of their excesses. In the boom phase, it’s very pleasant because you enjoy credit creation and, with that, comes wealth creation. In the bust phase, it’s very unpleasant because you have credit contraction, a reduction of leverage, a decline in the value of collateral, etc. and that involves wealth destruction.

Herr Doktor Professor Karl Popper also gets a guest reference, in a question on the interaction between freedom and empirical reality:

Q: You argue that freedom of thought doesn’t mitigate the misconception problem—that is, that an open society can’t produce a perfect market. Does it actually do the opposite?

A: It’s a somewhat different issue. I discovered a misconception in my own ideal of open society, which I kind of took over from Karl Popper. We all took it for granted that the purpose of critical thinking is to improve our understanding of reality. That’s the cognitive function. Then there’s this manipulative function, which is to change reality to meet your own desires, to influence people in a way that they’ll follow you. Politics is dominated by the manipulative function. You can’t take it for granted that critical thinking will give you a better understanding of reality. What you took for granted, you have to introduce as a requirement. I’m not abandoning open society at all; I’m just taking another step in what is necessary to bring about a well-functioning open society.

America, because of the adversarial, competitive nature of the political and economic system has really lost sight of the importance of understanding reality.

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