Getting to the root of the financial crisis

When I first read the newest book of George Soros – The New Paradigm for Financial Markets – I did not realize how prophetic he was in terms of the collapse of the banking system. He published his book in May and I’ve read it in August. Few weeks later Lehman Brothers went under…

Here are some paragraphs illustrating his foresight:

“When the financial system is endangered, the authorities must cave in. Whether they like it or not, institutions engaged in the credit creation must accept the fact that they are being protected by the authorities. They must, therefore, pay a price for it.

The authorities must exercise more vigilance and control during the expansionary phase. That will undoubtedly limit the profitability of the business. The people engaged in the business will not like it and will lobby against it, but credit creation has to be a regulated business.

Regulators ought to be held accountable if they allow matters to get out of hand so that an institution has to be rescued. In recent years matters did get out of hand . The financial industry was allowed to get far too profitable and far too big.”

It's a scam!

Much has been already said and written about the undercurrents of the financial crisis affecting the US and global economy. The closer one analyses it, the more it looks like a Ponzi scheme. I won't be able to describe it better than what I found on a recent blog:

http://aotearoaawiderperspective.wordpress.com/2008/11/13/the-two-trillion-dollar-black-hole/

How could such a strong economy fall into the trap of creating super bubbles, and then collapsing under its own weight? The answer is “lack of adequate regulations” in the financial system. Signs of self-implosion have been noted periodically in other sectors, but every time the answer was the expansion of trading zones (from national to regional, to continental, to global) in order to attract new people putting money into the pull, and thus keeping alive the illusion of perpetual outstanding returns.

The only difference now is that the inputting resources have reached their limits. The global population of potential contributors has been exhausted for the moment – until the purchasing power of the consumer markets like China, India, Russia and Brazil are brought up to par with the western counterparts.

Unfortunately, this crisis will not be the last one of this type. History will repeat itself years later, in a slightly different form, but fundamentally the same, because greed and irrational behaviour is embedded in the human nature.