The New Paradigm for Financial Markets: The Credit Crash of 2008 and What It Means

by George Soros   PublicAffairs Hardcover, $22.95 192 pages, illustrated ISBN: 978-1-58648-683-9

Book Review by Kam Williams

Was the bursting of the housing bubble just a momentary correction or the tip of the iceberg of an economic crisis about to envelope the entire country? George Soros believes we’re looking at the latter, and goes to great lengths to explain why, in his words, “This is the first time since the Great Depression that the international financial system has come close to a genuine meltdown.”

While the left-leaning billionaire might be best known for his criticisms of the Bush administration and for underwriting the efforts of MoveOn.org, many forget that he is also a brilliant businessman who amassed his great fortune speculating in the currency and stock markets. Now, with the publication of The New Paradigm for Financial Markets he shares with anyone who will listen exactly how we got into this mess, and where to invest your cash and dwindling resources to best weather the impending the collapse.

Though a bit dense at times in terms of statistical analysis, being awash in charts and graphs, the text is nonetheless the most fascinating contribution to the field of money management since the equally-absorbing best-seller Freakonomics. Interweaving politics with economics, Soros shows the role that greed and power have played in placing us in the current predicament.

For one, he rejects the classical economic theory which teaches that supply is a function of demand and vice-versa. Instead, he makes the radical argument that the supply and demand curves do not determine market prices at all; otherwise, we would generally witness greater price fluctuations.

Of far more consequence is power, which might explain why the cost of oil has skyrocketed since the election of a president who filled his administration filled with executives from that industry. “The primary purpose of political discourse is to gain power and to stay in power,” Soros states. “Those who fail to recognize this are unlikely to be in power.”

This is why Bush was more than willing to manipulate the truth in any way he saw fit to deceive the public while furthering the interests of big oil and other corporate conglomerates he is beholden to. This arrogant attitude is reflected in the Orwellian comment of a White House aide quoted as asserting, “We’re an empire now, and when we act, we create our own reality. . . . We’re history’s actors . . . and you, all of you, will be left to just study what we do.”

The 77 year-old Soros survived living under Hitler, and then survived living under Communism, and is presently unafraid to speak out forcefully when he recognizes the signs of the emergence of another such totalitarian regime. A sobering blend of financial and political analysis which incorporates the pivotal role of shady shenanigans and corporate corruption in the rapidly-approaching decline of a supposedly free market.

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Responses

OPEC or Financial Speculators—who's to blame?
 
What do you make of this?  Is it OPEC or financial speculators? I more or less believed this report: ‘Perhaps 60% of today’s oil price is pure speculation’ http://globalresearch.ca/index.php?context=va&aid=8878.
 
I find it a little difficult to believe Secretary Samuel Bodman that the problem is with Saudi Arabia. Where is Obama in this mix? Is he still talking about his unique biography and the American Dream?
 
The outcome of this meeting between producers and consumers and speculators should be something that we should keep a sharp eye. The Democratic Congress is hesitant to do anything before 2009.—Rudy

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Oil Summit to Take on Speculators

By BERND RADOWITZ and REEM SHAMSEDDINE
June 21, 2008 10:42 a.m.

JEDDAH, Saudi Arabia -- A joint working paper ahead of an oil summit here Sunday between energy producers and consumers is set to raise the heat on oil market investors by calling for tighter regulation and more data on the role of index funds, though the tone may rankle major free-market consumers such as the U.S. and U.K. The document, seen by French news agency AFP and which could, if agreed, form the basis of the summit's final communiqué, is to be presented to energy ministers, chief executives from the oil majors and leaders Sunday. It calls for action to "improve the transparency and regulation of financial markets through measures to capture more data on index fund activity and to examine cross exchange inter-actions in the crude market."

The document says that index funds and other investors have "unrealistic assessments" of the future value of oil.The summit Sunday between oil producers and consumers was arranged at short notice by Saudi Arabia. Surging oil prices are contributing to rampant inflation in parts of the world and are causing unwelcome headwinds to the sputtering economies of the U.S. and the U.K. . . .Wall Street Journal

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US energy chief: Low oil production drives price

JIDDAH, Saudi Arabia (AP) - The U.S. energy secretary said Saturday that insufficient oil production, not financial speculation, was driving soaring crude prices. Secretary Samuel Bodman's comments on the eve of an energy summit in the Saudi port city of Jiddah set the stage for a showdown between the U.S. and conference host Saudi Arabia, which has largely blamed speculation in the oil markets for record prices.

The U.S. and many other Western nations have put increasing pressure on Saudi Arabia, the world's top oil exporter, to increase production. Saudi officials have been hesitant to do so, arguing that soaring prices have not been caused by a shortage of supply.

Bodman disputed that assertion Saturday, saying oil production has not kept pace with growing demand, especially from developing countries like China and India. "Market fundamentals show us that production has not kept pace with growing demand for oil, resulting in increasing prices and increasingly volatile prices," Bodman told reporters. "There is no evidence that we can find that speculators are driving futures prices" for oil.

He said commodities markets have experienced a huge influx of money from financial investors in recent years, but they have been following the market upward rather than driving the increase in the price of oil. Saudi Arabia called the unusual meeting in Jiddah between oil producing and consuming nations as a way to show that it was not deaf to international cries that high oil prices have caused social and economic turmoil. . . .  AOL News

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Paul Craig Roberts [Why Oil Prices Are So High] former asst. Secy of Treasury and a WSJ editor (i.e. conservative) attributes the economic condition to "A Weak Dollar, Bad Fed Policies and Hedge Fund Speculators," and says "In an effort to forestall a serious recession and further crises in derivative instruments, the Federal Reserve is pouring out liquidity that is financing speculation in oil futures contracts.

Hedge funds and investment banks are restoring their impaired capital structures with profits made by speculating in highly leveraged oil future contracts, just as real estate speculators flipping contracts pushed up home prices. The oil futures bubble, too, will pop, hopefully before new derivatives are created on the basis of high oil prices."

This is my analysis exactly!  I am glad to see the professional economists are catching up with me!  Real estate is still too highly leveraged, and so too are oil futures speculations. 

Slavery before the Civil War was overcapitalized.   College educated working people who take out interest-only, adjustable rate sub-prime loans, and who piggy-back mortgages are the ones who create over-capitalized markets.  

This includes artists and intellectuals, who are also borrowing too much and pretending that their cases are special or justifiable.  Barney Frank is a supporter of a good bill, which Bush will veto if it ever gets out of Congress.Barney Frank is the only politician honest enough to point out that some people simply cannot afford to own a home. In my opinion many of the victims are eminently blameworthy. Wilson

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Why Oil Prices Are So High

By Paul Craig Roberts

Saudi Oil Minister Ali al-Naimi recently stated, “There is no justification for the current rise in prices.” What the minister means is that there are no shortages or supply disruptions. He means no real reasons as distinct from speculative or psychological reasons.

The run up in oil price coincides with a period of heightened US and Israeli military aggression in the Middle East. However, the biggest jump has been in the last 18 months.

When Bush invaded Iraq in 2003, the average price of oil that year was about $27 per barrel, or about $31 in inflation adjusted 2007 dollars. The price rose another $10 in 2004 to an average annual price of $42 (in 2007 dollars), another $12 in 2005, $7 in 2006, and $4 in 2007 to $65. But in the last few months the price has more than doubled to about $135. It is difficult to explain a $70 jump in price in terms other than speculation.

Oil prices have been high in the past. Until 2008, the record monthly oil price was $104 in December 1979 (measured in December 2007 dollars). As recently as 1998 the real price of oil was lower than in 1946 when the nominal price of oil was $1.63 per barrel. During the Bush regime, the price of oil in 2007 dollars has risen from $27 to approximately $135.

Possibly, the rise in the oil price was held down, prior to the recent jump, by expectations that Democrats would eventually end the conflict and restrain Israel in the interest of Middle East peace and justice for the Palestinians.

Now that Obama has pledged allegiance to AIPAC and adopted Bush’s position toward Iran, the high oil price could be a forecast that US/Israeli policy is likely to result in substantial supply disruptions. Still, the recent Israeli statements that an attack on Iran was “inevitable” only jumped the oil price about $8.

Perhaps more difficult to understand than the high price of oil are the low US long-term interest rates. US interest rates are actually below the rate of inflation, to say nothing of the imperiled exchange value of the dollar. Economists who assume rational participants in rational markets cannot explain why lenders would indefinitely accept interest rates below the rate of inflation. Counterpunch

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Anatomy of a Price Surge—But the invasion of Iraq—intended to ensure US control of the Gulf and a stable environment for the expanded production and export of its oil—has had exactly the opposite effect. Despite the many billions spent on oil infrastructure protection and the thousands of lives lost, production in Iraq is no higher today than it was before the invasion. Iraq has also become a rigorous training ground for extremists throughout the region, some of whom have now migrated to the oil kingdoms of the lower Gulf and begun attacking the facilities there—generating some of the recent spikes in prices.

Then there is the dilemma posed by Iran. With Saddam out of the picture, the Islamic regime in Tehran is viewed in Washington as the greatest threat to US mastery of the Gulf. This threat rests largely on Iran's ability to attack oil shipping in the Gulf and ignite unrest among militant Shiite groups throughout the region, but its apparent pursuit of nuclear weapons has inflated the perceived menace significantly. To restrain Tehran's nuclear ambitions, Washington has imposed economic sanctions on Iran and forced key US allies to abandon plans for developing new oilfields there. As a result Iran, with the world's second-largest reserves after Saudi Arabia, is producing only about half the oil it could—another reason for the global constriction of supply.

But the Administration's greatest contribution to the rising oil prices is its steady stream of threats to attack Iran if it does not back down on the nuclear issue. The Iranians have made it plain that they would retaliate by attempting to block the flow of Gulf oil and otherwise cause turmoil in the energy market. Most analysts assume, therefore, that an encounter will produce a global oil shortage and prices well over $200 per barrel. It is not surprising, then, that every threat by Bush/Cheney (or their counterparts in Israel) has triggered a sharp rise in prices. This is where speculators enter the picture. Believing that a US-Iranian clash is at least 50 percent likely, some investors are buying futures in oil at $140, $150 or more per barrel, thinking they'll make a killing if there's an attack and prices zoom over $200.

It follows, then, that while the hike in prices is due largely to ever increasing demand chasing insufficiently expanding supply, the Bush Administration's energy policies have greatly intensified the problem. By seeking to preserve our oil-based energy system at any cost, and by adding to the "fear factor" in international speculation through its bungled invasion of Iraq and bellicose statements on Iran, it has made a bad problem much worse. . . .

And if this Administration truly wanted to spare Americans further pain at the pump, there is one thing it could do that would have an immediate effect: declare that military force is not an acceptable option in the struggle with Iran. Such a declaration would take the wind out of the sails of speculators and set the course for a drop in prices. The Nation 

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posted 21 June 2008