Bests & Worsts Reviews from Amazon

I had bought this book based on a magazine article which indicated that the authors was giving his opinion on what is to be expected in the coming year. Who wouldn't pay a few dollars to know what a highly successful billionaire (and philantropist) trader thinks of a situation that has perplexed all economists and instilled fear in anybody who wasn't vacationing in the space station in the last year? I quickly bought and jumped straight to chapter 7: "My outlook for 2008". In that chapter, the author only describes a few short-term trades done in the first 3 months of 2008 that more or less went nowhere. For most of us, these are of little interest especially that most of them are hedge-fund style and involving shorting stocks, an activity likely to lead to the quick bankruptcy of most people (and including, in the past, a few well known high-flying traders, numerous hedge funds, and even two nobel-prize winners demonstrating to the world the practical monetary value of the actual theory for which they had won their nobel-price!) Well maybe I'll get more in the "Conclusion" chapter... Ah ah! There it is (p 158), I found it! : "Near panic conditions prevail in financial markets. People want to know what lies ahead." Yes, that's me! I want to know what lies ahead! ... That surely will be worth $10...! Y...e....s....!!! Now, here it is revealed to the world (Skip it if you don't want the punch line before reading the book): "I cannot tell them because I don't know" (p.159) ! That's it! And that's the penultimate page and the actual conclusion. So what is the point of the book? "What I want to tell them (the readers) is something different. I want to explain the human condition." ... with a title like "A new paradigm of the financial markets" released in a hurry in the middle of the crisis! Yah sure... Of course that is not true. The book is yet another attempt to describe his "reflexivity" theory (fully explained in previous books). The author only use the current crisis as a bait and switch teaser. And if you haven't read his previous books and don't know anything about that theory (and would like to know about it) I can tell you all there is to know virtually in a single paragraph: The author claims that economic classical theory is wrong because the classic demand/supply curve are considered as a given pre-existant independant entity while in reality the economic actors by their actions influence those curve and therefore those curve are not independant. Hence the term "reflexivity" to describe that reaction. A typical example is that if you have 2 company A and B with identical balance sheet and prospects and people believe (without "evidence") that company A will do better than company B and bid its share much higher, then A far from being overvalued, by the mere fact of the bidding up of its shares, is more likely to succeed as it will be able to raise more and cheaper money than B, and therefore the fact that the company is now more apt to succeed merits its higher price vs the other, a sort of virtuous cycle, a case of "reflexivity". The author actually does give similar example such as conglomerates and a few others. Well, while this observation is important, this is hardly a new concept. That is the whole idea of stock promotion and the like. Anybody in the market knows the game very well. And the same concept is well known in a lot of other field under different names: it is the "self-fulfilling prophecy" convenient to explain the paranoid self-inducted reinforcing view of the world in psychology, it is the "bio-feedback" mechanism in biology, it is the "chain reaction" in physics, it is the "recursion" programming paradigm, etc... All variation of the same underlying idea. It is a very important principle, and congratulation to Soros to put it in the limelight again. But should the title be more truthfully... be something like: "Reflexivity - The Important Economic Principle Too Often Ignored" The author does nevertheless write an excellent chapter on the genesis of the current "super-bubble". It will be nothing new to anyone who has read any newspaper, magazine or the internet on the subject in the last year. However, the author believes this bubble marks the end of a more important decades-old credit "superbuble" and therefore is more ominous. There is also a chapter on "policy recommendation". After accusing the Bush administration of being afflicted with "market fundamentalism" and the Fed of mismanagement ("The Federal Reserve has the legal authority to regulate the mortgage industry, which it failed to exercice" p 119) he supports the measures proposed by Representative Barney Frank: modifying the bankruptcy law to permit the bankruptcy judge to rewrite loan terms on a principle residence and empowering the Federal Housing Administration to provide guarantees that would help refinance subprime borrowers into affordable mortgages and do everything to avoid foreclosures. Now the summum of irony is that Soros's proposal of rewriting the term of the mortgage and preventing foreclosure is a flabbergasting case of a real life case of "reflexivity" at work that Soros appears to completely have failed to spot! Indeed! Let's figure it together. Citizen A and B are in the same middle-class situation with similar job, asset and income. Citizen A purchase a million dollar home and a few year later refinance it to pay for a brand-new jaguar car. Citizen B continues to rent and avoid debt. Normal "classical economy theory": citizen A is wrecklees, citizen B is more prudent and ultimately will be more successful and rich. How wrong! In a "reflexivity economy theory": citizen A is obviously much smarter and responsible because his behavior will "act" on the situation and therefore change the terms of the deal! Sooner than later he will become a "victim" about to loose his home, quickly becoming sought-after video material to a heart-breaking newsreport on a pathetic epidemic situation about to convulse America! So economic philosopher Soros and populist represensatives band together with their great ideas: change the deal, erase the debt (in part or completely), and in any case let the poor fellow drive home from his tv interview in his comfortable jaguar and have a needed restful sleep in his million-dollar home. Of course the government won't stop there. The Feds will allso lowers interest, debase the currency and the congress will increase tax to pay for it. Now Citizen A is obviously the huge winner. He gets "relief" with lower interest on his loan, he is ecstatic about the dollar debasement and the resulting inflation (which continues to increase the value of his home relative to his loan). He keeps his home. He keeps his car. Life is good! Meanwhile the stone-age "neo-classical" citizen B is now in a dire situation: his income has been reduced further by new taxes at the same time as his dollar assets has lost 30%-50% of their value relative to virtually all other currencies, fuel, home or any hard assets; his money market fund now provides him an even higher NEGATIVE after-inflation and after-rax interest rate (lowered nominal interest rate MINUS highered inflation MINUS highered tax= outrageously negative real after-tax interest rate) and therefore he is every year getting poorer and poorer. He is receiving little sympathy and certainly no TV appointment to talk about his situation. After all he is the "lucky" who is debt-free! He obviously must lose any dream to ever buy a home since they are now worth 50%-100% higher than when citizen A purchased them (and will remain at ridiculously inflated level relative to median income rate if Soros gets his way). And while his interest t-bill income has collapsed (thanks to Bernanke) and while his net salary was reduced by his increased income tax (soon to come...) his rent is already shooting up due to the increaing inflation. You can also apply reflexivity to the situation of the meager salary of CEO in a prudent and sound bank (if there still exist one, perhaps somewhere in a small town in Alaska, who hasn't yet disappeard in the new "reflexive" economy) and the $200 million bonus of a CEO of a "victim" hyper-leveraged bank rescued by the government Of course reflexivity can work both ways and in the end citizen B could become the big winner given appropriate measures to reverse the momentum. Soros does recognise that reflexivity can go in both direction and even overshoot. Unfortunalety Soros didn't seem to realise that the measures he is championing (ironically by the actual effect of "reflexivity"!), would ultimately reward irresponsibility and severely sanction virtuous citizen. More troublesome is Soros's silences. Nowhere does Soros propose nor even consider the possibility that, in such dire times, it might make sense that a law would retro-actively (or at least starting today) force immoral CEO to disgorge the proceed of their theft.... euh , I mean, their huge bonus given to them for bankrupting their companies. (However Soros do suggest to implement IN THE FUTURE some (vague) regulation of the mortgage (and derivatives) industry). So in essence Soros measures (or absence of measures) boils down to: for whoever already robbed the bank wether it be the mortgagee or the mortgagor or the CEO (or actually all of them since they were all acomplices) the government must step in and make sure they keep their spoil (wether it be their home or bonus). None of them should be forced to give anything back. And ALL of the cost should happily be beared by all the other taxpayers because it is apparently in their best interest to continue renting and paying for the home and the bonus of the others. Outrageous. End of reflexivity discussion. Let's now study a smarter proposal from Soros. Soros propose a clearing house or exchange for credit default swap that would enforce adequate margins requirement. But while this is a great idea for future contracts, what do you do with the existing contract which now, today, DON'T have that "adequate" margin? Do you really want to let the entire world know, all at once, what is the percentage of those contract that are worthless (creating in all certainty a panic that will lead almost certainly to the bankruptcy of many pension funds) or do you want to leave some fuzziness so that people can digest the news over a period of time (years or a least months as it is currently now done) and find ways to spread the pain over years? This is an especially crucial and important question when, as Soros points out, the actual value of those Credit Default Swap ($42 trillion) is equalt to the ENTIRE household wealth of the USA, and is 2.3 x times the capitalisation of the ENTIRE stock market in the Usa! I humbly proposed what I believe is a better variation, at least for the mortgage part (but it can be easily extended to commercial debt): - the current difficulty is that nobody knows the value of the products because they represent tranche of pooled mortgage and nobody knows what the value of each mortgage is, nevermind the value of the pooled one or the tranche. - we need a drastic dramatic measure because the situation is clearly dire and this permits revolutionary emergency measures - we should pass a law that all existing and future MORTGAGE and FINANCIAL INSTRUMENT based on mortgage will need to be registered in a new governement MORTAGE TITLE REGISTRATION AND CLEARING AGENCY with an independant status (to prevent political interference). That agency would have to value each existing mortgage. This could be done by various statistical method based on current price in neighborhood, size of home, obtaining information from institutions and property tax assesment, assessing the value of mortagee information emanating from specific institution based on previous experience with those institution, sampling, new interviews, obligation for each mortgagor and mortgagee to resubmit (on a regular basis) information on his financial situation (including obligation to notify when significant change occured, like losing a job or having a significant raise) with severe penalty (similar to false income tax declaration) if not truthful - you also require by law the registration of all mortage derivative instruments indicating for each which exact tranche of which exact mortgage it is linked to and who owns it - you put all the data in a computer. In a few minutes it will be able to deduct the value of each mortgage derivative because it will know what the instrument is structured (mandatory mortgage financial instrument registration) and what is the underlying value of the mortgages are (mandatory mortgage registration and actual agency valuation of each) - each institution must mandatory use the value emanating from that agency in their financial statement and each institution is also required to indicate the approximate market value of its mortgage financial instrument obtained as described below. - the agency creates a mortgage and mortgage financial instrument market to let anyone one in the world bid on any morgage financial instrument put on sale by anyone. The computer keeps track of the exact composition of each instrument and owners could automatically reslice and repackage them to sell only what they want (same thing for bidders proposal).This will permit bank in need to rapidly get rid of some mortgage to raise quick liquidity. Any owner of instrument could accept a bid of someone wanting part of his modified instrument and the registration agency computer would automatically change it - the mortgage payments could be collected by the agency, just like we now do with income tax and remitted immediately to the registered owner account. The huge advantage are - there will be no costly bailout by the taxapayer (undemocratically forced on them) - some imprudent bank will deservedly fail - some prudent bank and indiviuals who saved their money will be highly rewarded with good values, - other countries liquidity (sovereign funds, pensions funds, individuals, oil money) will be able to reliquidify the Usa therefore ... - the collapse of the dollar will possibly be averted, - a level playing field: this put an end to the "play favorite" where this bank or that bank "too big to fail" or "run by a good friend of ours or with who I work before or will give me a great job in the future", or "a friend that has contributed a lot to our party" gets deals that make a very few super-rich at the expense of taxpayer's money ... of course this always being presented altruisticly as 'having saved our citizen from the worse" - in the all we will all be better then before the crisis with a new evolutionary (if not revolutionary) easy and super-versatile way to issue and manage mortgage and create a world market out of it. I could easily see Google propose to make this happen in record time...