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Sunday, December 21, 2008

Soros: The Theory of Market Equilibrium is Wrong

George Soros says we need to revise regulation to keep bubbles "within tolerable bounds," but we also need to be careful of going too far:

Revise regulation, the theory of market equilibrium is wrong, by George Soros, Commentary, Project Syndicate: We are in the midst of the worst financial crisis since the 1930s. The salient feature of the crisis is that it was not caused by some external shock like OPEC raising the price of oil. It was generated by the financial system itself. This fact - a defect inherent in the system - contradicts the generally accepted theory that financial markets tend toward equilibrium and deviations from the equilibrium occur either in a random manner or are caused by some sudden external event to which markets have difficulty in adjusting. The current approach to market regulation has been based on this theory, but the severity and amplitude of the crisis proves convincingly that there is something fundamentally wrong with it.

I have developed an alternative theory which holds that financial markets do not reflect the underlying conditions accurately. They provide a picture that is always biased or distorted in some way or another. More importantly, the distorted views held by market participants and expressed in market prices can, under certain circumstances, affect the so-called fundamentals that market prices are supposed to reflect. ...[...continue reading...]...

    Posted by on Sunday, December 21, 2008 at 06:59 PM in Economics, Financial System, Regulation | Permalink  TrackBack (0)  Comments (25)


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