The Man Who Saw It Coming

If you want to read a sobering and accessible explanation of the financial crisis, go immediately to John Cassidy's piece in the current issue of the NY Review of Books. It's called He Foresaw the End of an Era. The "he" Cassidy is referring to is George Soros, who has just published a book with a very long title: The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.

If the author had been Warren Buffet, the book would already be a bestseller, and the pundits would be echoing its words all over the place. But this strange European named Soros doesn't quite command the same kind of trust with his brand, and in any case his pronouncements are too inconvenient to the conduct of business as usual. Too bad.

Here's what he wrote well before the recent financial meltdown:

Eventually the US government will have to use taxpayer's money to arrest the decline in house prices. Until it does, the decline will be self-reinforcing, with people walking away from homes in which they have negative equity, and more and more financial institutions becoming insolvent, thus reinforcing both the recession and the flight from the dollar.

The Bush administration and most economic forecasters do not understand that markets can be self-reinforcing on the downside, as well as on the upside. They are waiting for the housing market to find a bottom on its own, but it is further away than they think.

Apparently, we haven't reached the bottom yet. Might be worth listening to what else Soros has to say.

For one thing, Soros blames the crisis on the failure of banking regulators. They allowed the big banks to "self-regulate." The only outside check on their doings came from ratings agency like Moody's -- which depend on banks to pay them for their services. Soros calls the lack of regulation "the most shocking abdication of responsibility."

If they could not calculate the risk, they should not have allowed the institutions under their supervision to undertake them. The risk models of the banks were based on the assumption that the system is stable.

But, contrary to market fundamentalists' beliefs, the stability of financial markets is not assured; it has to be actively maintained by the authorities.

That's such a great word: "authorities." It has an unmistakable European ring to it, in contrast to this era in America in which "big gummint" has been on the defensive. The tide may be turning, and Soros forecasts the end of the free-wheeling era ushered in by Ronald Reagan and Margaret Thatcher.

What does the end of an era really mean? I contend that it means the end of a long period of relative stability based on the United States as the dominant power and the dollar as the main international reserve currency. I foresee a period of political and financial instability, hopefully to be followed by the emergence of a new world order.

That's a tough pill for Americans to swallow, to consider the emergence of a new world order, and his perspective explains why he's not the most popular character. Soros spent heavily in 2004 to try to defeat Bush, the man who presided over the current American decline. Though Soros failed in his efforts, no one can deny his was the smart money after all.

So despite the $700 billion bailout, it looks like its curtains for business as usual.

Now, if we can only get the "authorities" to listen to James Hansen, before a global environmental meltdown occurs -- a meltdown that will make this credit crisis look like a game of tiddly-winks.

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